The Bank of Nova Scotia (TSX:BNS) saw shares drop in May as Scotiabank stock came out with disappointing earnings for the quarter. In the face of a potential recession, inflation and higher interest rates, the company saw a hit to profits.
What happened?
Second-quarter earnings missed analyst estimates, as the company experienced more expenses but saw less loan growth. While Scotiabank has provisions for loan losses, these continue to be drained during this poor economic period.
Scotiabank net income fell 21% year over year to $2.2 billion, or $1.69 per share. Analysts expected $1.77 per share, providing a significant miss from estimates. Meanwhile, expenses rose 10% year over year. A major contributor? Hiring and larger salaries, as well as advertising costs. This was also felt around the world as Scotiabank stock continues to push its expansion in Chile, Colombia, Mexico, and Peru.
Is international a good idea?
Analysts are now wondering whether Scotiabank stock is a safe choice given its focus on South and Central American expansion. This is especially notable given that Chile and Colombia are in a recession as we speak.
A new study also found that those banks that stay focused on Canada tend to do better rather than those focused on international expansion. Economists have found that Canadian banks have not experienced a bank crisis since 1840. Meanwhile, there have been several in the United States, as well as in Latin American countries thanks to political, financial, and currency instability.
Analysts weigh in
Of course, analysts immediately weighed in on the results from Scotiabank stock, calling earnings “not great.” That being said, there were some signs of encouragement, especially in terms of outlook. Results were strong in Latin America and the Caribbean. Management also expects to expand from here as asset prices and costs continue their path of stabilization.
So for now, analysts retain a “hold” for Scotiabank stock. Its lower earnings show that right now is a struggle, but not one that it won’t be able to get out of. Don’t go thinking that the stock will suddenly go under in the near future. In fact, all Canadian banks remain a solid long-term hold.
However, if you’re hoping for a sudden comeback, you may want to hold off, as analysts continue to state. Especially as new management continues to increase expenses to pay for a “refresh.”
Bottom line
Scotiabank stock is certainly still a strong choice for Canadians wanting international exposure to emerging markets. It continues to see growth in numerous areas in this respect; however, expenses and interest rates continue to weigh on the company.
That being said, as inflation and interest rates stabilize, and this new “refresh” gets underway, costs will settle. The stock will certainly continue to see growth in earnings and revenue, and should certainly be back to pre-fall prices within a year’s time, likely less.
So long-term holders may view shares down 22% in the last year as a major deal – especially while trading at 9.2 times earnings and a 6.19% dividend yield to consider as well.
