Bank of Nova Scotia a Better Northern Neighbor than TD Bank

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Small businesses probably don’t see it this way, but America’s access to credit still is very good. According to the World Bank, the U.S. ranks fourth for credit access compared to 24th in Canada. You do not want to start a business north of the 49th parallel if access to capital is your missing ingredient. Toronto-Dominion Bank (NYSE:TD) does business on both sides of the border while Bank of Nova Scotia (NYSE:BNS) tends to go where others won’t, such as South America and Asia. It’s for this reason and others that I call on TD investors to sell their shares and buy Bank of Nova Scotia instead.

Third-Quarter Earnings

TD announced strong adjusted earnings of $1.58 billion, up 21% year over year, versus 18% or $1.29 billion for Bank of Nova Scotia — a virtual tie. So let’s look at some other numbers to get a better idea of their quality.

TD’s Tier 1 capital ratio is 12.9%, compared to 12.3% for BNS. JPMorgan Chase (NYSE:JPM), considered by many to be America’s best-run bank, finished Q3 with a Tier 1 capital ratio of 9.9% — 240 basis points lower than either Canadian bank. Perhaps all you Jamie Dimon fans ought to be considering moving your money north of the border, where your money’s safer.

For TD, success comes on both sides of the border. Its Canadian personal and commercial banking increased 13% year over year while its U.S. personal and commercial banking increased 20%. The U.S. definitely is where its future lies. Scotiabank, on the other hand, has a more diversified business model. All four of its operating segments contributed at least $250 million in net income in the quarter, whereas TD generated 60% of its net income from its Canadian banking business. If its U.S. expansion fails or increased Canadian competition crops up, its overall profitability is at risk. BNS’ international foray, including its recent purchase of 51% of Columbian bank Colpatria for $500 million, continues its move to diversify its revenue streams. The third quarter is proof its business model is working.

Wealth Management

In addition to Bank of Nova Scotia’s continuing sojourn into international banking, it’s also making a concerted effort to expand its wealth management division. In February, BNS completed a C$2.3 billion takeover of DundeeWealth Management, making it the fifth-largest mutual fund company in Canada and the third-largest of the banks. If I’m not mistaken, Royal Bank of Canada (NYSE:RY) and TD are Nos. 1 and 2, respectively.

In 2010, BNS bought the wealth management business of BNP Paribas in both Panama and the Cayman Islands. As it expands further into the Caribbean and Latin America, it is building strength across geographies, product lines and businesses. It’s going farther afield to grow its business, and ultimately it should prove to be more successful than TD, which has its hands full in a very competitive U.S. market. It might not be as glamorous, but Bank of Nova Scotia’s moves into emerging markets instead of the U.S. should result in a stronger business.

Awards

I usually don’t take stock in annual awards because they are so subjective, but Aon Hewitt’s 2012 list of the best employers in Canada highlights the need for big Canadian banks to work harder at making their businesses more welcoming for prospective employees. Only one of the big six made it into the top 25, and that was Bank of Nova Scotia in 23rd. TD was five places down at 28th.

Happy employees make productive employees. Investors considering any Canadian bank investment ought to take this into consideration when looking north of the border. I’m probably biased living in Canada, but having issued this warning, I can’t imagine any of the large American banks being any better. Especially after what’s happened the past three years.

Bottom Line

In terms of financial stability, there’s not much difference between TD Bank and BNS. Both are solid. However, Canadian companies competing successfully in the U.S. over the years are few and far between. Bank of Nova Scotia chooses to do business in emerging markets, where banking regulation is reasonably strong while competitive. Given both provide yield around 3.5%, my bet is with BNS.

As of this writing, Will Ashworth did not own a position in any of the aforementioned stocks.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2011/10/bank-of-nova-scotia-bns-td-bank-stocks-to-buy/.

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