TD Bank (TSX:TD) and Bank of Nova Scotia (TSX:BNS) are the second- and third-largest Canadian banks by market capitalization right now, respectively.

The stocks have delivered very different performances this year, and investors are wondering if TD stock or BNS stock is currently undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and total returns.

TD Bank stock

TD is the worst performer among the large Canadian banks in 2024. The stock is down 8% this year, while the others have all racked up gains. TD trades near $78.50. It was as high as $108 in early 2022 before going into an extended slide that took the stock as low as $74 this summer.

TD ran into trouble with U.S. regulators for not having adequate systems in place to identify and prevent money laundering at some branches in the American operations. The investigations recently concluded with TD being hit with fines of roughly US$3 billion. An asset cap has also been placed on TD's American business. This is the part that concerns investors. TD spent billions of dollars over the past two decades to acquire a string of regional banks from Maine down the east coast to Florida as part of its strategy to be a major player in the U.S. market. The asset cap effectively puts U.S. growth on hold. As a result, TD will have to look for other opportunities.

A new chief executive officer (CEO) will assume control in 2025. It will take some time for a new strategy to emerge, so investors will have to be patient. That being said, TD remains very profitable and the business in the United States should be attractive over the long run. Investors who buy TD stock at the current level can get a dividend yield of 5.2%.

Bank of Nova Scotia

Bank of Nova Scotia (TSX:BNS) is also in transition. The company brought in a new CEO last year to help generate better returns for investors. Bank of Nova Scotia is only slightly ahead of TD on its performance over the past five years.

The main challenge for Bank of Nova Scotia has been its large bets on Latin America. Bank of Nova Scotia built up businesses in Mexico, Peru, Colombia, and Chile through acquisitions. These countries are all members of the Pacific Alliance trade bloc that allows the free movement of capital, labour, and goods to the member markets. Low bank penetration in the cumulative market of more than 230 million people offers attractive growth potential as the middle class expands. However, political and economic turbulence elevates the risk of being in these countries. As such, investors have largely preferred the other large Canadian banks.

The new CEO is taking Bank of Nova Scotia in a new strategic direction. Capital investments are now being focused on the U.S. and Canada. Bank of Nova Scotia spent US$2.8 billion in recent months to buy a 14.9% stake in KeyCorp, a U.S. regional bank. At home, Bank of Nova Scotia has created a new executive position to oversee expansion in Quebec.

Bank of Nova Scotia trades near $79 at the time of writing. The stock is up 25% in 2024 but still sits below the $93 it reached in 2022. Investors who buy BNS stock at the current level can get a dividend yield of 5.35%.

Is one a better pick?

TD is probably oversold at this point, but investors will need to be patient. If you have a contrarian strategy, TD deserves to be on your radar.

Bank of Nova Scotia is further along in its turnaround efforts, but the stock isn't as cheap as it was last year. At this level, however, it still offers a good dividend yield and should deliver decent long-term total returns.

If you are looking to add bank exposure to a portfolio, you might want to split the investment between the two stocks at the current prices.