Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is Canada’s third-largest bank with a market capitalization of $93 billion. The bank just reported solid fiscal third-quarter (Q3) 2022 earnings, but the stock dropped more than 4% on news that capital markets revenues fell compared to last year and provisions for credit losses rose from fiscal Q2 2022.
The pullback appears overdone, and investors who missed the July bottom around $72 can now pick up Bank of Nova Scotia on another dip for close to $77 per share. The stocks traded as high as $95 earlier in the year, so there is decent upside opportunity when the sector rebounds.
Bank of Nova Scotia earnings
Bank of Nova Scotia generated adjusted fiscal Q3 2022 net income of $2.61 billion compared to $2.56 billion in the same period last year. That’s a decent result considering the economic headwinds and the steep drop in equity markets in recent months.
Canadian banking earnings rose 12%, supported by higher net interest income due to a sharp jump in interest rates. This is important for investors to consider, as they worry that higher interest rates will hurt loan growth and drive up loan losses.
International banking earnings came in at $625 million, up 28% compared to fiscal Q3 2021. Bank of Nova Scotia’s foreign operations are primarily located in Mexico, Peru, Chile, and Colombia. These countries make up the Pacific Alliance trade block and are home to more than 230 million people. The division continues to rebound from the pandemic and offers solid long-term growth opportunities for the bank.
Capital markets revenues fell in the quarter compared to the same period last year, and the group saw earnings drop 26%. This segment is typically more volatile than the retail banking operations and the weakness was expected.
Wealth management net income slipped 3% in the quarter to $376 million. Higher net interest income helped mitigate lower fee income due to the market correction.
Bank of Nova Scotia finished the quarter with a common equity tier-one (CET1) ratio of 11.4%. This means the bank has a strong capital position to ride out any turbulence that might be on the way if the Canadian economy goes through a recession in the next 12-24 months. In fact, there is ample excess cash to also buy back more stock on the dip and make strategic acquisitions that might become available after the meaningful drop in valuations that hit the financial sector this year.
Bank of Nova Scotia raised the dividend by 11% late last year and increased the payout by another 3% when the bank announced the Q2 2022 results. The current quarterly distribution of $1.03 per share provides an annualized dividend yield of 5.3%. That’s a great return for a top Canadian bank stock and investors should see the payout continue to grow at a steady pace, even if the recession arrives next year.
Should you buy Bank of Nova Scotia stock now?
Bank of Nova Scotia looks undervalued right now. The shares offer a great dividend yield, so new investors get paid well to wait for a recovery. If you have some cash to put to work in a self-directed RRSP focused on dividends and total returns, this stock deserves to be on your radar.