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Noah Zivitz

Managing Editor, BNN Bloomberg

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An analyst who covers Canada's Big Six lenders said Bank of Nova Scotia and Bank of Montreal are the best-looking buys as their shares trade at sizable discounts to historical norms.

Scott Chan at Canaccord Genuity assessed the bank stocks against his outlook for pre-tax, pre-provision income (PTPP). That’s a measure of profitability which sets aside the often volatile impact of funds moved in and out of loan-loss reserves. PTPP took on greater importance for analysts during the pandemic as the banks set aside billions of dollars for loans that they feared could go bad. Much of that money was later moved back into banks’ income statements.

Chan noted that PTPP for the Big Six rose an average of three per cent year-over-year in the three-month period that ended July 31. That profit growth was less than half of what he expected. He noted as well that BMO and Scotia lagged their peers, with outright declines in PTPP during the quarter.

Based on his PTPP estimates for the 2023 fiscal year, Chan assessed Bank of Nova Scotia to be the cheapest of the stocks, as it trades at a 31 per cent discount to historical averages over the last 15 years. BMO isn't far behind at a discount of 25 per cent. Adding to the appeal of BMO, Chan estimates its PTPP per share will surge 17 per cent in the next fiscal year, which would outpace the other banks.

"We suggest that Bank of Nova Scotia (largest discount) and BMO (highest ... growth forecast) appear most attractive. Both stocks are trading near trough valuation levels," Chan stated in his report.

He has buy recommendations on both of those stocks, as well as Canadian Imperial Bank of Commerce. He has hold ratings on Royal Bank of Canada, Toronto-Dominion Bank, and National Bank of Canada.

Bank of Nova Scotia is trading near its lowest level since early 2021 amid persistent concern about how its international business will fare, particularly during the pandemic. The bank's most recent results didn't assuage those concerns, as that division's non-interest income and net interest margin contracted — and prompted a slew of analyst downgrades in the process.

Since March 2020, Bank of Nova Scotia's stock rose .98 per cent through the close of trading Wednesday. The TSX banks industry group (which includes the Big Six, Canadian Western Bank, Laurentian Bank of Canada, EQB Inc., and Home Capital Group Inc.) rose 20.16 per cent over that same timespan.