TD’s share price has soared since the start of 2025 while Scotiabank’s is down.Fred Lum/The Globe and Mail
Toronto-Dominion Bank TD-T has been making an impressive comeback from its regulatory snafu last year, while Bank of Nova Scotia BNS-T is still struggling to gain traction with its own turnaround efforts. Why are these two laggards diverging?
Canada’s big banks operate within a highly regulated oligopoly that essentially reflects the economy. When one lender underperforms, it has an uncanny ability to roar back to health soon after, often rewarding investors who take their chances on duds.
The year-to-date performance numbers for TD and Scotiabank, though, offer a stark contrast between two banks that are desperately trying to regain credibility with investors.
The one that’s paying off: TD. Its share price has soared 24 per cent since the start of 2025, leading all of its peers by a wide margin.
The gains follow a dismal stretch last year when the lender ran afoul of U.S. regulators over its flawed anti-money laundering practices. By December, the share price was slumping toward a four-year low and its once-premium valuation was in tatters.
This year’s rebound supports the case for ignoring bad news and blindly investing in bank stocks that have fallen out of favour.
But wait a minute: There’s also Scotiabank to consider here.
Its stock performance has trailed peers by 37 percentage points over the past three years alone, on average, and its relatively new chief executive officer has sworn to fix its problems. These two factors alone should have put the stock on the radar screens of investors who can’t resist a laggard.
Their reward for scooping up an unloved bank stock: more lagging.
Scotiabank’s share price, though up over the past year, has retreated 5 per cent in 2025. It is trailing all its peers and offering a rebuttal to anyone who thinks that an underperforming lender can just flick the switch on a sustained recovery.
There are a couple of key differences between TD and Scotiabank, though, which may offer some nuances to this contrarian stock-picking strategy that has attracted the attention of the pros.
The first is the most obvious: The banks are known for expanding into two very different markets.
TD has bet big on the United States with a massive retail footprint there. While growth is now capped following last year’s settlement with regulators, it’s still a market that resonates with investors.
Scotiabank, though, has wagered on Latin America, where economic growth is strong but so are the risks – especially in Mexico, where a trade war with the U.S. is threatening the country’s automotive sector.
The second key difference is that TD was in the doghouse last year over a single crisis – the money-laundering thing – while Scotiabank is trying to shake off years of lacklustre profit growth, sluggish efficiency and waning confidence.
This difference is now playing out in their quarterly results. While TD delivered a couple of upbeat surprises, Scotiabank disappointed on a couple of measures when it reported this week.
Amid rising U.S. tariffs and economic uncertainty, investors have become focused on what are called provisions for credit losses, or PCLs. This is money set aside to cover troubled loans that could default. Rising PCLs are a big deal because they come straight off a bank’s profits.
TD set aside $1.34-billion in provisions during the quarter, up 25 per cent from last year – but the increase was lower than expected, which is good news.
The other bright spot: TD’s net earnings, excluding a windfall from the sale of its stake in Charles Schwab Corp., was $1.97 a share – also better than expected.
The reaction from analysts, who weren’t so hot last year on TD’s prospects, has shifted dramatically as they boost their target prices – or where they think the shares will trade within 12 months.
In one standout example, Gabriel Dechaine, an analyst at National Bank of Canada, raised his target price on TD to $98 from $80.
He now expects the shares can trade at 11.5 times his 2026 estimated earnings, up from a price-to-earnings ratio of 10, reflecting “greater confidence in our earnings forecasts,” Mr. Dechaine said in a note.
Scotiabank, on the other hand, produced a couple downers in its quarterly results. Its PCLs increased by 40 per cent from last year and its earnings were slightly below analysts’ expectations.
Mr. Dechaine’s upgrade to Scotiabank’s target price this week: A mere buck.
The final takeaway from the divergence between TD and Scotiabank this year? The laggard approach to buying a bank stock has a lot going for it, which TD has demonstrated rather well so far this year. But like any stock-picking strategy, it doesn’t always work.