Canadian banks delivered mixed results in 2024, with some soaring and others finishing the year lower. The recent pullback in the bank sector has investors wondering which TSX bank stocks might be undervalued right now and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio targeting dividend and total returns.
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TD Bank
TD (TSX: TD) had a rough run in 2024. The stock is down 10% over the past 12 months and now trades near $78 per share compared to $108 in early 2022.
Cuts to interest rates in Canada and the United States gave most bank stocks a lift in the back half of 2024 as investors started to bet that the economy would see a soft landing in 2025 and that businesses and households with too much debt would get relief on interest charges as loan rates decline.
TD had some company-specific issues, however, that spoiled the party. Regulators in the United States imposed fines of more than $3 billion on TD and placed an asset cap on the bank’s U.S. operations as penalties for not having proper systems in place to detect and prevent money laundering in the U.S. business.
TD’s American operations grew substantially over the past two decades through a series of acquisitions that built a business running from Maine right down the east coast to Florida. Growth in the U.S. is now effectively on hold. As a result, TD’s incoming chief executive officer will have to set a new course for the bank in the next few years to expand revenue and profits.
Shareholders will need to be patient, but TD should eventually get back on track. In the meantime, investors can pick up a solid 5.4% dividend yield. The bank remains very profitable and has a good capital position to ride out some tough times.
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) is also in transition. The bank is pivoting its growth strategy away from Latin America to focus capital on the United States and Canada. In 2024, Bank of Nova Scotia spent US$2.8 billion to buy a 14.9% stake in KeyCorp, a U.S. regional bank. The move gives Bank of Nova Scotia a platform to expand its American operations.
Bank of Nova Scotia recently announced the sale of its operations in Colombia, Panama, and Costa Rica, taking expected impairment charges of roughly $1.4 billion on the sales and another potential $300 million hit on closing. The news is the main reason the stock is down this week.
The bank still has a large presence in Mexico, Peru, and Chile. Mexico is expected to remain strategically important, but the remaining Latin American businesses could potentially be monetized to free up capital for acquisitions in other markets. In Canada, Bank of Nova Scotia recently created a new executive position to oversee an expansion in Quebec.
As with TD, investors will have to wait for the benefits of the strategy shift to emerge, but there is decent upside potential for the stock. Bank of Nova Scotia is up 16% in the past 12 months, trading near $74 per share at the time of writing. In early 2022, the stock was as high as $93.
Investors who buy BNS stock at the current level can get a dividend yield of 5.7%.
The bottom line on Canadian bank stocks
TD and Bank of Nova Scotia are contrarian picks right now in the bank sector, but they pay attractive dividends and offer a shot at decent upside over the long run. If you have some cash to put together, these stocks deserve to be on your radar.
