The financial regulators in the United States recently had to take possession of an American tech industry-focused lender Silicon Valley Bank amid liquidity and insolvency issues. While the regulators have taken timely steps to protect Silicon Valley Bank’s depositors, this collapse has made bank investors extremely worried across the globe by making them doubt the credibility and reliability of large financial institutions.
Amid these concerns, let me give an example of a popular Canadian bank, Bank of Nova Scotia (TSX:BNS), to explain why it continues to be among the safest bank stocks to own for the long term.
What makes Scotiabank different from Silicon Valley Bank
When you’re picking a stock to invest in for the long term, you must always make sure it has a robust business model underpinned by well-diversified revenue streams. A diversified portfolio becomes even more important for financial institutions, as it helps them minimize risks to a great extent and gain investors’ confidence.
It’s important to understand that an extremely high percentage of uninsured deposits at Silicon Valley Bank was one of the key reasons for its liquidity issues and collapse. But unlike Silicon Valley Bank, such liquidity concerns are unlikely to impact Scotiabank, as its balance sheet remains solid with its limited exposure to any single sector.
While Scotiabank makes most of its earnings from Canadian and international banking segments, a large part of its profits also come from global wealth management and global banking and markets segments. Even geographically, its business is well diversified. Besides its home market, it makes a good portion of its revenue from markets like the United States, Mexico, Chile, Peru, and Colombia.
To give you an idea about the underlying strength in its financial growth trends, Scotiabank’s revenue rose 16% in five years between its fiscal year 2017 and 2022 (ended in October 2022), despite facing global pandemic-driven challenges in between. During the same period, the Canadian banking giant’s adjusted earnings jumped 30%, encouraging its management to raise its dividend per share by 33%.
Is BNS stock worth buying now?
BNS stock tanked by 25.9% last year, posting its biggest weekly losses in 14 years. The year 2022 began with big challenges for stock investors, as consistently high inflation encouraged central banks in Canada and the United States rapidly increase interest rates. As a result, high-growth stocks that witnessed a sharp rally in the previous year started crashing in 2022.
In addition, the Russian invasion of Ukraine added to investors’ worries, as growing geopolitical tensions triggered a massive rally in the prices of energy products. This factor made inflationary pressures more severe, which started affecting corporate earnings. These key factors further dimmed the short-term economic outlook, triggering a stock market selloff across sectors. This broader market downturn was the key reason BNS stock plunged sharply last year.
While BNS stock showcased strength at the start of 2023 by rising 8.6% in January, it turned negative again, as macroeconomic uncertainties and the possibility of a looming recession are keeping bank investors on their toes.
With this, Scotiabank now trades with 2.5% year-to-date losses at $65.73 per share and has a market cap of $78.3 billion, making it look undervalued to buy for the long term. Despite short-term challenges, Scotiabank stock has the potential to stage a sharp recovery in the long run and also offers an attractive 6.3% dividend yield. Given its strong fundamentals, this dip in BNS stock could be an opportunity to buy an amazing dividend stock for the long term.
