Why The Bank of Nova Scotia Is Such a Bargain Right Now

The Bank of Nova Scotia’s (TSX:BNS)(NYSE:BNS) shares have fallen far more than those of its peers, and now trade more cheaply, too. This is a great opportunity.

| More on:
The Motley Fool

Over the past three months, the S&P/TSX Composite has been in full-blown correction mode, dropping close to 6%, despite a more recent rebound. But there is some good news: The Canadian banks have mostly been able to escape the market’s wrath. Over this time, five out of the big 6 have lost no more than 2.4%.

However, one bank has fared particularly poorly: The Bank of Nova Scotia (TSX: BNS)(NYSE: BNS), which has lost 7.4% of its value. Why is this the case? And are Bank of Nova Scotia shares now a bargain?

First, a little context

The Bank of Nova Scotia proudly calls itself “Canada’s most international bank”, and rightfully so. Nearly 50% of earnings came from outside Canada’s borders last year, much of this coming from emerging markets, particularly Latin American countries. To be more specific, CEO Brian Porter said the bank would emphasize Mexico, Colombia, Peru, and Chile. All of these countries have very healthy and fast-growing economies. So Bank of Nova Scotia should have plenty of opportunities to grow earnings for years to come.

Contrast this with a bank like Canadian Imperial Bank of Commerce (TSX: CM)(NYSE: CM). The bank has nearly all of its business (including more than 90% of its loans) in Canada, making it very difficult to grow earnings. New CEO Victor Dodig has reiterated the bank’s commitment to grow its wealth management business. But this strategy usually requires expensive acquisitions.

So why the falling share price?

Bank of Nova Scotia shares have not only lagged peers for the past three months. They have lagged badly throughout all of 2014. One of the main reasons has been nervousness about emerging markets. The chaos in the Middle East, Ukraine, and elsewhere have prompted investors to put their money in safer places such as the United States.

Making matters worse, Bank of Nova Scotia’s growth numbers haven’t impressed in recent months. In fact, adjusted profit in the most recent quarter was on par with the quarter before that. Growth has slowed in Canada, and the bank is also struggling in geographies like Asia and the Caribbean. Many investors are running out of patience.

So is this an opportunity?

The sell-off appears to be overdone. Bank of Nova Scotia’s problems are very minor, and are also relatively short term. Furthermore, the nervousness surrounding emerging markets really shouldn’t apply to Bank of Nova Scotia — the bank is concentrated in relatively safe jurisdictions.

And now, shares are trading very cheaply, at only 11.5 times earnings. In fact, none of the big 6 trades this cheaply. This almost seems unfair for a company with such strong growth prospects. But it also means there’s a tremendous opportunity to pick up a great company at a discount.

This discussion leaves out the other big 5 banks, but the free report below covers those in greater detail.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

More on Bank Stocks

edit Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Bank Stocks

Is TD Bank Stock a Good Buy Now?

Here’s why TD Bank stock looks even more attractive to buy for the long term after its upbeat second-quarter earnings.

Read more »

consider the options
Bank Stocks

Is TD Bank Stock the Best Bank Stock for You?

TD Bank stock is reflecting a lot of the negative news. It remains a top bank stock trading at attractive…

Read more »

Bank sign on traditional europe building facade
Bank Stocks

Prediction: These 2 Canadian Bank Stocks Are Next in Line to Pop

National Bank of Canada (TSX:NA) and another bank stock look ready to roar higher in the second half of 2024.

Read more »

analyze data
Bank Stocks

Should You Load Up on TD Bank Stock?

TD Bank (TSX:TD) stock has bounced back a bit since its recent lows, but the best may be on the…

Read more »

Businessperson's Hand Putting Coin In Piggybank
Stocks for Beginners

3 Dividend Stocks Every Investor Should Own

Heading into earnings season, which bank stocks are best for dividend income?

Read more »

stock research, analyze data
Bank Stocks

Should Investors Buy the Correction in TD Stock?

TD stock is down more than 25% from the 2022 high. Is it finally time to buy?

Read more »

Bank Stocks

Could Royal Bank Stock Reach $200?

Growing rate cut hopes and improving analysts’ expectations from Royal Bank’s financial results could help its stock maintain strong upward…

Read more »

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Bank Stocks

1 of the Best Dividend-Paying Bank Stocks to Buy Now and Hold Forever

Here’s a very reliable, dividend-paying Canadian bank stock you can buy at a bargain right now and hold for the…

Read more »