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BMO vs. BNS: Which Foreign Bank is Better Ahead of Earnings?

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Key foreign bank earnings that are scheduled for release next week are likely to provide a better understanding of the sector’s near-term prospects. The central focus for foreign banks in the short term will be the one-time U.S. tax charges and the way it will affect their full-year profits.

Additionally, several major central banks across the globe are looking to normalize their monetary policy. This, in turn, will keep the momentum alive in the foreign banking sector this year after registering a steady recovery in 2017.

Further, according to the International Monetary Fund (IMF) global economic growth is projected to expand by 3.9% in 2018, better than the pace of 3.8% witnessed in 2017. Also, the IMF expects tax cuts in the United States to benefit the global economy in the coming months. This along with a steady growth outlook in 2018 is expected to benefit foreign banks in the long run.

In this context, The Bank of Nova Scotia (BNS - Free Report) and Bank Of Montreal (BMO - Free Report) which are scheduled to report on May 29 and May 30, respectively, assume greater significance. Both foreign banks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other major stocks reporting earnings from May 28 to Jun 1 include salesforce.com, Inc. (CRM - Free Report) and HP Inc. (HPQ - Free Report) .

Price Performance

Bank of Nova Scotia has gained 11.4% in the past one year, outperforming the broader industry that has moved up 6.3% over the same period. In comparison, Bank Of Montreal has not only outperformed the broader industry but is also ahead of Bank of Nova Scotia, gaining 17.3% over the same time frame.

Valuation

Compared with the S&P 500, the industry is clearly undervalued. This implies that the industry has upside potential for the near future. The industry has an average trailing 12-month P/B ratio – which is the best multiple for valuing banks because of large variations in their earnings results from one quarter to the next – of 1.40, which is below the S&P 500’s average of 3.86. Hence, it might be a good idea not to abstain from stocks belonging to this industry.

Moreover, coming to the two stocks under consideration, with a P/B ratio of 1.67 in the last one year, Bank of Nova Scotia is clearly underpriced than both the industry and Bank Of Montreal’s P/B ratio 1.68.

Dividend Yield

Bank of Nova Scotia’s dividend yield over the last year is 4.07%, higher than the broader industry’s figure of 2.94%. With a dividend yield of 3.65%, Bank of Montreal shareholders earns a lower dividend yield than Bank of Nova Scotia.

Return on Assets (ROA)

Return on assets (ROA) is one of the key financial ratios for banks as they rely heavily on their assets to create revenues. A positive ROA indicates that the company has reported gains from its assets for the period in question. Coming to Bank of Nova Scotia and Bank of Montreal, ROA for the trailing 12-months (TTM) is 0.91% and 0.76%, respectively. Bank of Nova Scotia has a higher ROA than not only Bank Of Montreal, but also the industry, which has ROA of 0.54%.

Earnings History, ESP and Estimate Revisions

Considering a more comprehensive earnings history, Bank of Nova Scotia has delivered positive surprises in three of the prior four quarters, with an average earnings surprise of 2.5%. On the other hand, Bank Of Montreal has witnessed positive surprises in two of the prior four quarters, with an average earnings surprise of only 0.08%, losing this round to its rival.

Both foreign banks have an Earnings ESP of 0.00%. At the same time, the earnings estimate for the current year has increased by 0.6% Bank of Nova Scotia’s over the last 60 days but has declined for Bank Of Montreal by 0.3%. 

Conclusion

Our comparative analysis shows that Bank of Montreal holds an edge over Bank of Nova Scotia when considering only price performance. However, when considering the return on assets, valuations and dividend yield, Bank of Nova Scotia holds an edge over Bank of Montreal.

Additionally, when we take a more comprehensive look at the companies’ previous earnings performance and estimate revisions, Bank of Nova Scotia is clearly the better stock. In this respect, it is evident that Bank of Nova Scotia holds a clear edge over Bank of Montreal ahead of their earnings releases next week.

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