Bank of Nova Scotia (TSX:BNS) is down 14% in 2023 and just hit a low not seen since the fall of 2020. Contrarian investors seeking high dividend yields and a shot at decent potential capital gains 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) portfolio.
Bank of Nova Scotia Stock
Bank of Nova Scotia trades for close to $56 per share at the time of writing compared to $93 in early 2022. The decline is largely the result of rising interest rates in Canada and the United States.
The Bank of Canada and the U.S. Federal Reserve are increasing interest rates as a tool to try to reduce inflation by slowing down the economy. In the ideal scenario, the central banks will be able to get inflation back down to their 2% target without sending the economy into a deep downturn. Investors aren’t convinced this will be the case. They worry that the central banks have hiked interest rates too much and will keep them elevated for too long. Higher borrowing costs that are designed to reduce consumer and business spending could eventually lead to a severe recession, as people burn through savings to cover increases in their loan payments and mortgage rates.
Cracks are already appearing in the loan books. Bank of Nova Scotia nearly doubled its provision for credit losses to more than $800 million in the fiscal third quarter (Q3) of 2023 compared to the same period last year. In the coming quarters, investors should expect to see the trend continue across the bank sector.
Bank of Nova Scotia recently announced plans to cut roughly 3% of its workforce to adjust to the current market conditions. This is largely in line with what the other large Canadian banks are doing as they look for ways to trim expenses and make operations more efficient.
A new chief executive officer took charge at Bank of Nova Scotia this year. Several senior roles already have new faces as part of a management overhaul. Investors will likely get more information about Bank of Nova Scotia’s strategic review when the fiscal Q4 results come out and at the investor presentation planned for December.
Pundits speculate that Bank of Nova Scotia might decide to shrink its international presence in Latin America. The bank has operations in Mexico, Peru, Chile, and Colombia. These members of the Pacific Alliance trade bloc are home to a combined population of more than 230 million. As the middle class expands, there is a good opportunity for growth in loans and sales of investment products. The big bets on these markets, however, have yet to pay off for investors. Bank of Nova Scotia’s share price performance has trailed its large Canadian peers in recent years.
Mexico will probably remain strategically important, but the businesses in the other three countries could potentially get sold with funds redirected to opportunities in other markets. The U.S., for example, has been a focus of expansion for the other four large Canadian banks.
Bank of Nova Scotia dividend
Bank of Nova Scotia increased the dividend earlier this year. This should be an indication that the board is not overly concerned about the earnings outlook. The bank remains very profitable, even in the current environment, and management has done a good job of increasing the capital cushion to enable the bank to ride out some economic turbulence.
At the time of writing, BNS stock offers a 7.5% dividend yield. At the very least, the distribution should be safe.
Is Bank of Nova Scotia a buy?
At the current level, the stock appears priced for a major economic downturn. That could turn out to be the case, but economists broadly anticipate a short and mild recession to occur next year or in 2025.
Ongoing volatility should be expected until there is clarity on the end to rate hikes. However, contrarian investors with a buy-and-hold strategy might want to start nibbling on BNS stock near this level. At the current yield, you get paid well to wait for the rebound, and there is attractive upside potential on a recovery.