Bank of Nova Scotia (TSX:BNS) and Royal Bank of Canada (TSX:RY) reported decent fiscal third-quarter (Q3) 2024 results amid a bank earnings season that is seeing wide variations among the traditionally solid Canada banks. Investors who want to add or boost their bank exposure are wondering if BNS stock or RY stock is still undervalued and good to buy for a self-directed Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA) portfolio.
Bank of Nova Scotia
Bank of Nova Scotia surprised some analysts earlier this month when it announced a US$2.8 billion purchase of nearly 15% of KeyCorp, an American regional bank. The move is part of Bank of Nova Scotia’s new growth strategy under the new chief executive officer (CEO), who will focus investments in the U.S., Canada, and Mexico. This is a shift from the strategy under previous CEOs who spent billions of dollars to acquire assets in Colombia, Chile, and Peru. The bets on these emerging markets haven’t translated into the anticipated returns for shareholders. Bank of Nova Scotia’s international operations still generate decent results, but economic and geopolitical uncertainty in the three markets might be one reason investors have not been willing to give BNS stock a better earnings multiple.
Bank of Nova Scotia trades near $66 per share at the time of writing compared to a 12-month low of around $55, but the stock is still way off the $93 it reached in early 2022.
Adjusted fiscal Q3 2024 net income came in at $2.19 billion compared to $2.21 billion in the same period last year. Adjusted return on equity came in at 11.3% compared to 12.1% in Q3 2023. Provisions for credit losses (PCL) continued to climb in the quarter, coming in at $1.05 billion compared to $819 million in the same period last year and $1.01 billion in fiscal Q2 2024. Rate cuts by the Bank of Canada should help borrowers who have been hit with higher interest payments in the past two years. As rates decline, PCL should level off, and investors might even see PCL reversals in 2025 or 2026 if unemployment doesn’t soar.
Bank of Nova Scotia’s Q3 performance is better than some of its peers but not stellar. It will take time for the new strategy to deliver results for investors, and the international operations could remain a headwind for the stock unless management decides to exit the South American markets.
That being said, Bank of Nova Scotia’s stock is likely still oversold. At a current 12-month trailing price-to-earnings ratio of about 11.6, the stock is cheaper than its larger peers. Investors who buy BNS stock at the current price can get a dividend yield of 6.4%.
Royal Bank
Royal Bank is Canada’s largest company, with a current market capitalization of nearly $223 billion. At the time of writing, the stock is at a record high near $160 as investors cheer the latest earnings results.
Royal Bank reported adjusted net income of $4.7 billion for the three months, up 18% compared to the same period last year. Royal Bank is getting a nice boost from its $13.5 billion purchase of HSBC Canada. The new assets increased net income by $259 million in the quarter. Adjusted return on equity rose to 16.4% from 15.5%, and PCL came in at $659 million, up 7% compared to Q3 2023 but down $261 million from Q2 2024, so it looks like Royal Bank is ahead of its peers on PCL reductions.
Royal Bank isn’t a cheap stock, but it is a standout performer in the Canadian banking space. That being said, a pullback wouldn’t be a surprise in the near term, given the nearly 50% gain off the 12-month low. Investors who buy Royal Bank stock at the current level can get a dividend yield of 3.5%.
Is one a better pick?
Contrarian investors seeking high-yield dividend stocks for a portfolio primarily focused on generating passive income should consider Bank of Nova Scotia as their first choice right now.
If you are more conservative and are targeting total returns over the long haul, Royal Bank should be a safe pick, even at the current price. I would probably split a new investment between the two stocks today and look to add to the positions on new weakness.
