Big Six bank specialist finds both stocks trading at attractive prices relative to history
Bank of Nova Scotia and Bank of Montreal are the best-looking buys, according to an analyst who tracks Canada's Big Six lenders, as their shares trade at significant discounts to historical norms.
Canaccord Genuity's Scott Chan evaluated the bank stocks in light of his pre-tax, pre-provision income forecast (PTPP), a measure of profitability that ignores the frequently erratic impact of money coming in and going out of loan-loss reserves.
Analysts paid more attention to PTPP during the pandemic as banks set aside billions of dollars for loans they feared might default, reported BNN Bloomberg. A significant portion of money they reserved for loan losses was later redirected into bank income statements.
In the three months that ended on July 31, Chan noted that PTPP for the Big Six increased by an average of 3% year over year, an increase in profit that was less than half of what he had anticipated.
He also pointed out that BMO and Scotia fell behind their peers in terms of PTPP during the quarter, with outright declines.
Chan determined Bank of Nova Scotia to be the most affordable of the stocks based on his PTPP projections for the 2023 fiscal year as it currently trades at a 31% discount to historical averages over the previous 15 years.
With a 25% discount, BMO isn't far behind. Chan predicts that BMO's PTPP per share will increase 17% in the upcoming fiscal year, outpacing other banks, which will increase its appeal.
"We suggest that Bank of Nova Scotia (largest discount) and BMO (highest ... growth forecast) appear most attractive. Both stocks are trading near trough valuation levels," Chan stated in his report.
Read more: BMO expands US footprint with US$16bn Bank of the West deal
Both of those stocks, along with Canadian Imperial Bank of Commerce, have buy recommendations from Chan. He has given the National Bank of Canada, Toronto-Dominion Bank, and Royal Bank of Canada hold ratings.
Continual worries about how its international business will fare, particularly during the pandemic, have caused Bank of Nova Scotia's stock to trade near its lowest level since early 2021. Recent results from the bank didn't allay those worries, as that business line's non-interest income and net interest margin shrank, leading to several analyst downgrades.
By the end of trading on Wednesday, Bank of Nova Scotia's stock had increased 0.98% since March 2020.
The Big Six, Canadian Western Bank, Laurentian Bank of Canada, EQB Inc., and Home Capital Group Inc. are all part of the TSX banks industry group, which increased by 20.16% during that same period.
