Picking among any two of Canada’s largest six banks is an exercise in futility, or at least it may feel like one for many investors. That’s partly due to the fact that many investors view these companies in a very similar light, and that’s something that makes sense.
National Bank of Canada (TSX: NA) is the smallest of Canada’s big six banks, providing a strong dividend yield of around 6%, which is complemented by strong earnings growth of around 8% per year. With a solid valuation of less than 10 times earnings, there’s a reason why many investors consider this bank right now.
On the other hand, Bank of Montreal (TSX: BMO) is a bit more pricey, trading at a trailing price-earnings ratio just under 13 times with a dividend yield just below 5%. That said, investors may like the company’s more advanced diversification profile and its size factor on a relative basis.
Here’s how I would think about dividing up a $12,000 investment into these two banks right now.
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Compare and contrast
The key differences between National Bank and BMO really boils down to the banks’ individual segments, its geographical exposure, and underlying fundamentals.
On the fundamentals front, as mentioned, National Bank may appear more attractive at first glance. This is a stock that’s trading at a significant discount to peers such as BMO, which may position this holding as a premier alternative for value-conscious investors.
But from an earnings growth perspective, BMO takes the cake with year-over-year net earnings growth of around 45% this past quarter. Stronger client activity and trading volume have allowed this bank (which also focuses on a growing wealth management and capital markets division) to grow at an impressive pace.
Both banks have emphasized growing their wealth management and capital markets business, though National Bank is more exposed to the Canadian commercial market. For those concerned about a recession, that’s not a good thing. Thus, this is one of the key factors I think is driving the bank’s relatively low multiple.
Finally, on the geographic diversification front, BMO stands out as the winner. Roughly 40% of the company’s revenue comes from its U.S. operations. So, until these dynamics change, this is likely to be the more attractive choice for most investors.
Bottom line
In my view, the question of how to split up a $12,000 investment between these two banks really comes down to an individual investor’s risk profile and growth needs. For those with a longer investment time horizon, tilting one’s portfolio toward National Bank may make more sense. However, more conservative investors who may value portfolio stability over growth may opt for BMO in this environment.
Personally, I’d most likely split my investment between the two banks if I had to, given my more balanced approach. But again, this is a decision every investor should make via factoring in their own unique needs (as is every investment decision, for that matter).
