The S&P/TSX Composite Index suffered another steep loss on October 29, shedding 165 points. Major indexes in Canada and the United States rallied in early trading, but this fizzled out in the afternoon. Investors now enter the final two trading days in what has been a brutal October.
Back in late September, I’d discussed whether a collapse in trade talks between the United States and Canada could result in short-term losses for bank stocks. Canada and the United States managed to come to a tentative agreement. Unfortunately, bank stocks have still suffered a significant pullback over the course of this ongoing correction.
Today, I want to focus on my top bank stock to scoop up in this dip. That stock is Scotiabank (TSX:BNS)(NYSE:BNS). Let’s go over three reasons why investors should look to stash it in their TFSAs before 2018 comes to an end.
Scotiabank is discounted due to the market pullback
Shares of Scotiabank have dropped 9.7% month over month as of close on October 29. The stock’s pricing was favourable before this dip and has dropped 14% in 2018 so far. Its price/earnings and price/book ratios have climbed past the industry average in 2018. Shares have been driven below the $70 mark for the first time since October 2016.
Rising rates will continue to boost banks in the near term
The Bank of Canada elected to raise the benchmark rate to 1.75% on October 24. The central bank was optimistic about fundamentals, but this did not ease market turbulence. On the contrary, the TSX suffered its largest single-day drop in three years on the same day the rate hike was announced.
The rate-tightening environment has many analysts and economists spooked after nearly a decade of historically low interest rates and easy monetary policies in the developed world. Canadian banks have benefited from this environment so far. In the second quarter, Scotiabank reported adjusted net income of $1.14 billion in its Canadian Banking segment, representing a 9% year-over-year increase. One of the major factors for this increase was margin expansion on the back of higher interest rates.
Scotiabank is expected to release its fourth-quarter and full-year results on November 27. Investors have good reason to expect a strong finish to 2018.
Big moves in emerging markets should be a boon to Scotiabank’s business
Scotiabank boasts one of the top emerging market portfolios of the Big Six Canadian banks. Adjusted profit in its International Banking segment rose 15% year over year in Q2 2018 to $715 million. This was primarily due to strong loan and deposit growth in Latin America.
Scotiabank is the only Canadian financial institution operating with a full banking licence in Brazil since 2011. On October 29, Brazil held an election that saw Social Liberal Party leader Jair Bolsonaro come to power. Bolsonaro has promised several pro-market reforms, including independence of the central bank, sweeping privatization, pension reform, tax simplification, and reduction in tax exemptions to businesses.
Brazil is the largest economy in Latin America and one of the top 10 largest economies in the world. Reforms in Brazil could lead to improved economic activity, which should bolster Scotiabank’s Latin America-focused emerging market portfolio going forward.
