Bank of Montreal (TSX: BMO) and Bank of Nova Scotia (TSX: BNS) are two of Canada’s best-known banks. Both are big players in Canada; both have operations abroad; and both pay big dividends. As large Canadian banks, BMO and BNS are well-represented in Canadian investors’ portfolios, having outsized weightings in TSX exchange-traded funds (ETFs).
Truth be told, an investor would probably do pretty well by holding a diversified portfolio consisting of BMO, BNS, and several other big Canadian banks. Banking, in Canada, tends to be a top-performing sector.
However, there are also reasons for wanting to pick and choose between BMO and BNS. For one thing, concentrated positions provide the potential to outperform a benchmark (though it’s not guaranteed). For another thing, many investors enjoy the feeling of supporting companies they like. So, it’s worth comparing BMO and BNS side by side, so we can judge which is the better opportunity today.
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What they do
Bank of Montreal and Bank of Nova Scotia are both, as their names imply, banks. However, they differ in terms of which banking segments and geographical locations they focus on. Both banks are pretty big in Canadian retail banking (i.e., banking for everyday Canadians). BMO is involved in U.S. investment banking, which Bank of Nova Scotia isn’t. BNS’s non-Canadian operations are mainly in Latin America. There, the bank lends money to individuals and businesses.
Performance
When it comes to performance, BMO seems to have BNS beaten. It has positive growth in the last 12-month, and 5- and 10-year periods. BNS’s revenue and earnings both shrank in the trailing 12- and 5-year periods. Bank of Montreal also has a growth catalyst in the form of its recent Bank of the West acquisition, which could drive higher earnings going forward (This year, the new subsidiary’s financial impact was buried under lingering acquisition costs). Lastly, BMO’s profit margin (26%) was higher than BNS’s (22%) in the trailing 12-month period. So, BMO wins on historical performance.
Valuation
Next we can look at valuation. Bank of Montreal stock is fairly cheap today, trading at 14 times earnings, 3.4 times sales, and 1.2 times book value. However, BNS stock is optically cheaper, trading at 12 times earnings, 3.2 times sales, and 1.1 times book. Bank of Nova Scotia’s multiples are a little lower, but then again, BMO is growing more. So I wouldn’t take this comparison as decisively better for BNS.
Risk
Last but not least, we have the matter of risk. In the most recent quarter, BMO had pretty good risk management metrics, including a 13.5% common equity tier 1 (CET1) ratio and a $350 million increase in provisions for credit losses (PCL). A CET1 ratio above 11% and a rise in PCL indicate prudent risk management. BNS, for its part, reported a 13.2% CET1 ratio and a 30% jump in PCL. The similar metrics here argue that the two banks are tied on risk management.
Foolish takeaway
Taking everything in this article into account, I think that Bank of Montreal is an overall better value than Bank of Nova Scotia. BMO stock is performing much better while trading at only slightly higher multiples.
