The Canadian stock market witnessed quite a bit of turbulence in 2023, largely due to uncertain macroeconomic conditions, high inflation, and a rapid increase in interest rates. However, recent signs of cooling inflation seem to be making stock investing attractive again.
Easing inflation is likely to prompt the Bank of Canada and the Federal Reserve to consider lowering interest rates in the future. As a result, bank stocks, which saw declines earlier in the year, now look more appealing for investors looking to buy them at a bargain in December 2023. I see this possibility of a bounce back in bank stocks as a great opportunity, especially for investors with a long-term approach. This is because the anticipation of an improved economic environment and potential rate cuts in 2024 could lead to a significant rally in bank stocks, making them attractive options to consider now.
In this article, I’ll highlight two of the best TSX bank stocks you can buy today that I find undervalued based on their long-term fundamentals.
Bank of Montreal stock
Bank of Montreal (TSX:BMO) is the first top TSX bank stock you may want to consider in December. After witnessing around 7% value erosion in the first three quarters of 2023, BMO stock has already seen a 6.5% recovery in the ongoing quarter, trimming its year-to-date loss to less than 1%. With this, the Toronto-headquartered bank currently has a market cap of $87.5 billion as its stock trades at $121.99 per share. At this market price, this bank stock also offers a decent 5% annualized dividend yield.
In its fiscal year 2023 (ended in October), the Bank of Montreal registered a 7.2% YoY (year-over-year) increase in its total revenue to $28.4 billion. Despite a handsome increase in its net interest income amid a high interest rate environment, a sharp decline in its non-interest income restricted its revenue growth. As a result of recent weakness in its corporate services and wealth management segments, BMO’s adjusted annual earnings declined 11.3% YoY to $11.73 per share.
Nonetheless, as potential rate cuts in the near term lead to an improvement in the economic outlook, the Bank of Montreal’s provisions of credit losses could drop and improve its financial growth trends. That’s why I expect its share prices to inch up in the next year.
Bank of Nova Scotia stock
Bank of Nova Scotia (TSX:BNS), or Scotiabank, could be another fundamentally strong bank stock to consider on the TSX today. It currently has a market cap of $74.8 billion as BNS stock trades at $62.08 per share after witnessing 6.4% declines in 2023 so far. The recent declines, however, have made its annualized dividend yield look even more attractive which currently stands at 6.8%.
Similar to the Bank of Montreal, Scotiabank also managed to post positive revenue growth in its fiscal year 2023 (ended in October). However, its adjusted earnings witnessed steep declines of 23% YoY during the year due mainly to a notable increase in its provisions for credit losses and weak performance of its global wealth management segment.
On the positive side, the bank’s capital market segment showed encouraging signs of recovery with high revenue in the October quarter. This growth could accelerate further in the coming quarters as the market environment gradually stabilizes. Moreover, expected interest rate cuts are likely to help the Bank of Nova Scotia’s profit margin rebound, which could help its stock recover fast.
