Bank of Nova Scotia (TSX:BNS) is currently the second worst-performing Canadian bank stock among the Big Five banks. BNS stock has lost 8.8% of its value in 2023 so far to trade at $60.23 per share, slashing its market cap to $72.9 billion. With this, the Scotiabank stock is underperforming the broader market as the TSX Composite Index has risen 3.5% year to date.
In this article, I’ll explain why the recent dip in BNS stock could be a rare buying opportunity for investors, especially for those who can hold it for the long term. But first, let’s quickly look at some key reasons that have driven Scotiabank stock downward of late.
Why BNS stock fell
A big selloff in most Canadian bank stocks, including Scotiabank, started last year after the central banks in Canada and the United States began rapidly raising interest rates to fight inflation. While these interest rate increases boosted Scotiabank’s net interest income, its non-interest income started sinking. At the same time, a higher interest rate environment increasingly made it difficult for individuals and businesses to borrow money. Similarly, high market volatility also started taking a toll on Scotiabank’s wealth management segment. These are some of the primary reasons why BNS stock tanked by about 26% in 2022.
While bank investors expected an improvement in the macroeconomic scenario in 2023, persistent inflationary pressures continued to force central banks to keep raising interest rates in the first half of the year. And this is the primary reason why BNS stock has failed to recover in the ongoing year.
Scotiabank’s recent financial performance
The negative factors mentioned above have affected Scotiabank’s financial performance in the last few quarters. In the first three quarters (ended in July) of its fiscal year 2023 combined, the Canadian lender’s total revenue rose nearly 1% YoY (year over year) to $24 billion. This revenue growth could primarily be attributed to the strong performance of its residential mortgages and business banking loan segments.
However, despite positive revenue growth, weakness in its global wealth management segment and higher provisions for credit losses drove its adjusted earnings down by about 18% YoY during the same three quarters to $5.28 per share. These results failed to regain investors’ confidence, which is clearly reflected in BNS stock’s disappointing year-to-date performance.
Is now the right time to buy Scotiabank stock?
While Scotiabank’s financial growth trends haven’t been impressive in the last few quarters, we shouldn’t forget that these dismal trends are primarily a result of temporary external factors, including high inflation, elevated interest rates, and a challenging market environment.
On the positive side, we have already started seeing evidence of cooling inflation in recent months. These early signs of cooling inflation give strength to the possibility that the latest round of interest rate hikes might already be over. If this trend in inflation continues, it could soon encourage the Bank of Canada and the Federal Reserve to consider easing their monetary stance, which can help BNS stock stage a steep recovery.
Given these favourable expectations, recent declines in BNS stock look like an opportunity to buy this fundamentally strong bank stock at a bargain to hold for the long term.
