Bank of Nova Scotia (BNS -2.16%) and Toronto-Dominion Bank (TD -0.24%) are both down around 10% or so in 2022. There are reasons for their declines, but for long-term investors, the price drops here could present a solid opportunity to buy these Canadian financial giants. Here's a quick look at each.
An acquisition binge
Toronto-Dominion, or TD Bank as it's more commonly known, is offering a 4% dividend yield today. That's toward the high side of the bank's historical yield range, hinting that it is trading hands at a reasonable, if not an attractive, level. One key reason for this is the fear of a recession, which is not at all unreasonable.
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If there's an economic downturn in the U.S. and/or in Canada, TD's two primary markets, loan defaults are likely to tick higher and loan growth will probably slow. That would put pressure on the bank's top and bottom lines. However, TD Bank had a very high Tier 1 capital ratio of 14.7% at the end of the second quarter. The Tier 1 ratio measures a bank's ability to withstand financial adversity, with higher numbers being better than lower ones. This bank looks prepared for a downturn.
The longer-term story, however, is about growth. TD Bank is a dominant name in Canada with an entrenched position. It is a big player in the United States, too, but there's still plenty of room for it to grow south of the border. In fact, it is working on two acquisitions right now. In February it agreed to buy First Horizon, expanding its banking footprint in the Southeastern United States. And in August it inked a deal to buy Cowen, which will materially increase TD's U.S. securities business.
Over more than a century, TD Bank has proven it can withstand economic headwinds. So if you can see past the near-term economic concerns and focus on the growth platform management is building, this high-yield bank could be worth adding to your portfolio.
Positioned in long-term growth markets
Bank of Nova Scotia, or Scotiabank depending on who you ask, is a similar story, but with a slightly different twist. Like TD Bank, Scotiabank is an entrenched giant in Canada. It has sold off, too, because of concerns about an economic slowdown and the impact that would have on its business. However, the really big difference here is that Scotiabank isn't focused on growing in the U.S. market. Its latitudinal focus falls all the way down into South America.
To be fair, that increases risk, since South American economies haven't historically been as stable as the United States. Which is why the stock's dividend yield is 5%, a full percentage point above TD's yield. However, the less-developed region has an opportunity to grow at a faster clip. For investors with a long-term outlook and who are willing to stomach some volatility over short periods, Scotiabank offers a unique combination of Canada's conservative foundational core with a South American growth flair.
Some numbers will help. Scotiabank is the third-largest bank in Canada, which represents roughly 65% of its earnings. This is a mature market and has been fairly stable over time, thanks to strict banking regulations. Meanwhile, Scotiabank is also No. 3 in Peru, No. 3 in Chile, No. 5 in Mexico, and No. 6 in Columbia. These countries make up most of the rest of earnings, though Scotiabank does have other exposures, like the 6% of earnings that come from the United States. Still, the big picture here is that Bank of Nova Scotia is a sizable player in key developing markets in South America, and that should support the bank's long-term growth.
Like TD Bank, Scotiabank is well over 100 years old. It has proven it can roll with the economic punches, though its Tier 1 capital ratio was a fair bit lower at 11.6% at the end of the second quarter. Still, for more growth-minded dividend investors, the current yield, at the high end of its historical range, should be pretty enticing.
Buying despite the overhang
There's no question that a recession would be bad news for both TD Bank and Scotiabank, but the risk has opened up an opportunity for those willing to think long term. Both of these ultrahigh-yield banks are well positioned to weather adversity, have experience dealing with headwinds, and are working on growing their already sizable businesses. TD Bank is probably more appropriate for conservative investors than Scotiabank, but if you buy both you will, effectively, have exposure to all of the Americas. That's a fairly interesting income proposition.
