Bank of Nova Scotia (TSX:BNS) is down considerably from its 2022 highs. Contrarian investors who missed the rally off the 2020 market crash are wondering if BNS stock is now oversold and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividends and total returns.
Bank of Nova Scotia overview
Bank of Nova Scotia is currently Canada’s fourth-largest bank with a market capitalization near $72 billion. The stock trades for close to $59.50 at the time of writing compared to $93 in early 2022.
The decline is largely due to investor fears that soaring interest rates will cause a recession and trigger a wave of loan defaults.
Bank of Nova Scotia set aside more than $800 million for potential bad loans when it reported fiscal third-quarter (Q3) 2023 results. This was almost double the amount from the same period last year, but it is still very small compared to the overall loan book, which should be in solid shape. However, the longer the Bank of Canada keeps interest rates at current or higher levels, the larger the risk that a severe economic downturn could occur.
Bank of Nova Scotia also has an international division with operations primarily located in Mexico, Peru, Chile, and Colombia. These members of the Pacific Alliance trade bloc offer great long-term growth potential as their middle class expands. However, Bank of Nova Scotia’s investors have not reaped the rewards from the heavy investments in the region, and political and economic uncertainty is a constant concern.
Bank of Nova Scotia’s new chief executive officer is expected to announce shifts to the bank’s strategy in December at the company’s investor presentation. Pundits speculate that some of the international operations could be sold with funds being allocated to opportunities in other markets. The other large Canadian banks have focused on expansion in the United States in recent years.
Bank of Nova Scotia earnings
Bank of Nova Scotia remains a very profitable bank, even as it faces the current economic headwinds. Adjusted net income came in at $2.2 billion in fiscal Q3 2023 compared to $2.6 billion in the same period last year. Bank of Nova Scotia’s common equity tier-one (CET1) ratio rose to 12.7% from 11.4% in fiscal Q3 2022. This means the bank has a larger capital cushion to ride out difficult times.
Bank of Nova Scotia increased the dividend earlier this year. That should be a signal to shareholders that management isn’t overly concerned about the profit outlook. At the current share price, the dividend provides investors with a 7.1% yield.
Is BNS stock a buy today?
Ongoing market volatility should be expected until there is certainty that interest rates will not go higher. If the predicted soft landing for the economy turns out to be a more severe downturn, additional downside is possible in the bank sector.
That being said, Bank of Nova Scotia pays an attractive dividend that should continue to grow. At the current share price, BNS stock already appears oversold, and buyers at this level get paid well to wait for the rebound. If you have some cash to put to work in a contrarian portfolio focused on dividends, this stock deserves to be on your radar.