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Canadian bank stocks have been big winners in 2024, leading the market higher. But there are still opportunities for long-term investors to put money to work.
We looked for the most undervalued financial services stocks in the Morningstar Canada Index, and two banks stood out. Toronto-Dominion Bank TD and Bank of Montreal BMO both carry Morningstar Ratings of 4 stars. Additionally, TD has a wide economic moat, and BMO has a narrow rating. Historically, undervalued stocks with moats have performed better over time than less profitable, more indebted counterparts. They also tend to protect against downturns and be less risky than lower-quality stocks.
For a list of other banks covered by Morningstar and their ratings, see the table at the end of this story.
What’s in the Morningstar Canada Index?
The Morningstar Canada Index comprises equities of all sectors, with an emphasis on financial services, industrials, basic materials, and energy stocks. It measures the performance of large-, mid-, and small-cap stocks in Canada, representing the top 97% of the investable universe by market capitalization.
Morningstar’s Takes on Two Undervalued Bank Stocks
Toronto-Dominion Bank
Fair Value Estimate: C$88.00
Morningstar Rating: 4 stars
Economic Moat: Wide
Morningstar Uncertainty Rating: Low
“Toronto-Dominion is one of the two largest banks in Canada by assets and one of six that collectively hold roughly 90% of the nation’s banking deposits. The bank derives approximately 55% of its revenue from Canada and 35% from the United States, with the rest from other countries. TD Bank has done an admirable job of focusing on its Canadian retail operations and growing into number-one or -two market share for most key products in this segment. The bank also has number-two market share for business banking in Canada. With over C$400 billion in Canadian assets under management and top-three dealer status in Canada, and being the number-one card issuer in Canada, TD Bank should remain one of the dominant Canadian banks for years to come.
“TD Bank has also established a significant presence in the United States, with the most branches there of any Canadian bank, as well as a 12% ownership stake in Charles Schwab. While we like the higher exposure to more growth in the US, the segment has lower returns on equity than the Canadian segment, partially because of goodwill but also partially because returns are naturally lower on average. We also like TD Bank’s positioning as a major discount brokerage player because we believe this industry is ripe for growth as investors seek out lower-cost alternatives, and the bank could leverage its knowledge of the industry for future growth in Canada.”
Click to read more of what Michael Miller says about TD Bank.
Bank of Montreal
Fair Value Estimate: C$133.00
Morningstar Rating: 4 stars
Economic Moat: Narrow
Morningstar Uncertainty Rating: Low
“Bank of Montreal is the fourth-largest bank in Canada and one of six Canadian banks that collectively hold almost 90% of the nation’s banking deposits. The bank derives roughly 60% of its revenue from Canada and 30% from the United States. BMO has a well-established Canadian banking presence, an established US retail operation in the Midwest, and growing commercial and capital markets capabilities. It is also the second-largest asset manager among the Canadian banks, as well as the second-largest ETF provider in Canada.
“BMO is not one of the largest or most dominant retail banks in Canada, as we rank it in the lower half of the Big Six. However, with its more commercially focused book, it boasts good share in its domestic commercial lending market, particularly for loans under C$25 million. Additionally, BMO has the lowest relative exposure to residential mortgage loans among its peers, helping to mitigate some of the risks in its loan book, although a true housing crisis could cause a recession and hurt commercial loans indirectly.”
Click to read more of what Michael Miller says about BMO.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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