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There’s no shortage of bargains on the TSX Index, especially among some of the big-league financials. In the Canadian financial scene, the big bank (the so-called Big Six) behemoths, also known as top TSX banking stocks, have been under serious pressure in recent years.
While some have begun to show signs that they can still deliver on the capital gains front, many of them are still stuck in the gutter. With interest rates on the decline (the Bank of Canada recently cut rates, likely months ahead of the U.S. Federal Reserve), inflation that’s now mostly under control, and macro pressures that stand to fade away into 2025, I’d argue that the big banks are opportunistic buys right now.
Sure, you could reach for the recent banking leader. However, I’d argue there’s much more upside potential (and yield) to be had with some of the more battered banks, some of which are dealing with severe idiosyncratic issues.
Canadian Banks on Sale?
Indeed, TD Bank (TSX:TD) stands out as a top bank to consider buying on the dip. Historically viewed as a premium bank, TD is now trading at what we believe to be a significant discount to its intrinsic value, primarily due to the money-laundering crisis and the financial and non-financial penalties that have yet to be announced. Critics fear penalties could be as high as $4 billion—a substantial amount but not detrimental to one of Canada’s largest and most trusted financial institutions.
While there’s uncertainty regarding TD’s growth narrative over the next three years, the bank’s capital ratio is healthy, and it has the resources to weather this crisis. A new CEO and changes in risk management may be enough to regain shareholder confidence.
Banking on BMO Stock After Its Decline
Though TD stock looks cheap, we think Bank of Montreal (TSX:BMO) offers better value this June. BMO provides more certainty with its long-term growth story and a modest price of admission after the stock dropped following weak quarterly earnings.
BMO stock fell over 8% after the quarter and is now down around 11.5% from its 52-week highs near $134 per share. The stock may look unattractive on the chart, but its valuation does not.
BMO trades at 14.1 times trailing price-to-earnings (P/E) and offers a 5.22% dividend yield—a heavy yield by BMO standards. As BMO moves past a forgettable quarter, We believe it could perform better in the second half of 2024. For the second quarter, BMO set aside more cash to prepare for potential bad loans.
Despite the tough macro climate, BMO’s profound financial strength remains intact. CEO Darryl White highlighted the firm’s balance sheet, noting the common equity tier 1 (CET1) ratio is above 13%. This is not just good; it’s fantastic.
In conclusion, both TD Bank and BMO present compelling opportunities for investors looking to capitalize on the current discounts in the Canadian banking sector. While TD offers potential for long-term recovery, BMO provides a blend of certainty and attractive yield.
