Bank of Montreal (TSX: BMO) and Bank of Nova Scotia (TSX: BNS) have been on a roll for several months. Investors who missed the surge are wondering if BMO stock or BNS stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and total returns.
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Bank of Montreal
Bank of Montreal is up 25% in the past six months. The stock trades near $143.50 at the time of writing compared to the 12-month high of around $147. BMO has almost recovered all of the losses from 2022, when it hit $152 before sliding as low as $103 in 2023.
Bank of Montreal purchased California-based Bank of the West for US$16.3 billion two years ago. The bank negotiated the deal in late 2021, near the peak of the post-pandemic rally in bank stocks. Shortly after Bank of Montreal closed the deal, the U.S. bank sector went into a tailspin caused by the failure of a handful of U.S. regional banks.
Since the completion of the deal, Bank of Montreal has dealt with rising loan losses at Bank of the West. This is part of the reason BMO stock pulled back so much. In recent months, however, the market has warmed up to the long-term prospects for Bank of Montreal in the American market. Investors appear to be of the opinion that the worst is over for provisions for credit losses (PCL). Bank of the West added good exposure to the California market and expanded BMO Harris Bank, which has grown in the U.S. through a series of acquisitions over the past 40 years.
Bank of Montreal has a market capitalization of close to $105 billion, making it the third-largest Canadian bank right now based on this metric.
Investors who buy Bank of Montreal at the current level can get a dividend yield of 4.4%.
Bank of Nova Scotia
Bank of Nova Scotia is up about 15% in the past six months, but has been on a downward trend since early December. The stock trades near $73 per share at the time of writing compared to $80 a few months ago. It was as high as $93 in 2022 before going into a steady slide that took the stock as low as $55 in the fall of 2023.
Bank of Nova Scotia has underperformed its peers over the past five years. This is largely attributed to the international business the company built through decades of acquisitions in Mexico, Peru, Chile, Colombia, and other Latin American countries.
The idea was to benefit from the rise in the middle class and to access a vast population of unbanked people. The four members of the Pacific Alliance trade bloc (Mexico, Chile, Peru, Colombia), for example, are home to a combined population of more than 230 million people.
Economic and political volatility make these markets challenging, however, and Bank of Nova Scotia’s shareholders have not seen the desired returns.
Looking ahead, things might change. The new chief executive officer at the bank is charting a new course for driving growth. Bank of Nova Scotia spent US$2.8 billion in 2024 to acquire a 14.9% stake in KeyCorp, a U.S. regional bank. The deal gives Bank of Nova Scotia a good platform to expand its presence in the American market.
At the same time, the bank is starting the process of exiting the holdings in Latin America. Bank of Nova Scotia recently sold its businesses in Colombia, Costa Rica, and Panama.
It will take time for the turnaround effort to bear fruit, but contrarian investors can pick up the stock at a discount and currently get a dividend yield of 5.8%.
Is one a better pick?
Bank of Montreal is positioned well to benefit from growth in the United States, and the 4.4% dividend yield is decent. Bank of Nova Scotia potentially has more upside torque on a successful transition, but there is work to do for the new management team. The 5.8% yield, however, pays investors well to wait. At the current levels, I would probably split a new investment between the two stocks.
