Bank of Nova Scotia Stock: Buy, Sell, or Hold?

Bank of Nova Scotia just reported fiscal 2023 results. Is the stock’s dip a buy or is more downside on the way?

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Bank of Nova Scotia (TSX:BNS) just reported fiscal fourth-quarter (Q4) 2023 results. The stock initially dropped 5% on the news, and investors are wondering if BNS stock is good to buy on the dip or should be avoided heading into 2024.

BNS stock

Bank of Nova Scotia trades for close to $57 per share at the time of writing. The stock fell as low as $55 in October and was above $90 in early 2022.

Long-term shareholders are frustrated by the decline in the past two years and the weak performance compared to its larger Canadian peers. With a current market capitalization near $70 billion, Bank of Nova Scotia is the fourth-largest bank in the country based on that metric.

Bank of Nova Scotia fiscal Q4 2023 earnings

The bank generated adjusted fiscal Q4 2024 net income of $1.67 billion compared to $2.62 billion in the same period last year. Adjusted diluted earnings per share slipped to $1.26 from $2.06, and return on equity dropped to 8.9% from 15% in fiscal Q4 2022.

For the full year, adjusted net income came in at $8.44 billion compared to $10.75 billion in fiscal 2022. Adjusted diluted earnings per share dropped to $6.54 from $8.50. Overall return on equity was 11.7% compared to 15.7%.

Bank of Nova Scotia maintains a solid capital cushion. The common equity tier-one (CET1) ratio rose to 13% by the end of fiscal Q4 2023 from 11.5% at the end of fiscal 2022.

Bank of Nova Scotia set aside more cash to cover potential loan losses and expects the number to climb in the coming quarters as high interest rates put additional pressure on commercial and retail customers. The Q4 2023 provision from credit losses (PCL) was $1.26 billion, up from $819 million in Q3 and more than double the $529 million the bank allocated in Q4 2022. For all of fiscal 2023, Bank of Nova Scotia had a PCL of $3.42 billion, up from $1.38 billion last year.

It is important to note that the PCL number represents loan losses that might occur based on the bank’s evaluation of the loan portfolio rather than actual losses. If conditions turn out to be better than anticipated, as occurred during the pandemic, some of the PCL could be reversed.

Investors have to try to decide if Bank of Nova Scotia is being overly cautious with its PCL or should be setting more cash aside.

Outlook

Bank of Nova Scotia predicts earnings will be “marginally” better in 2024. The company announced a 3% reduction in staff in 2023. This will help reduce expenses next year.

Bank of Nova Scotia is also expected to unveil its new long-term strategy at the coming investor day. Pundits speculate the company might decide to sell some of its international operations. Bank of Nova Scotia has a large presence in Mexico, Peru, Colombia, and Chile. Mexico will likely remain strategically important, but the other three markets could be on the chopping block.

Funds raised by monetizing non-core assets could be used to pursue growth opportunities in other markets. Bank of Nova Scotia’s large Canadian peers have focused on the United States in recent years.

Dividend

Bank of Nova Scotia raised its dividend in 2023. The distribution should be safe and currently provides an annualized yield above 7%.

Is BNS stock a buy?

Ongoing volatility should be expected until the Bank of Canada signals it is done raising interest rates to battle inflation. Economists broadly expect the economy to go through a short and mild recession next year or in 2025. Assuming that turns out to be the case, BNS stock is likely oversold right now. However, a deep economic contraction would put additional pressure on bank earnings in the next couple of years, and share prices could test new 12-month lows.

Investors who already own Bank of Nova Scotia should probably hold the position at this point. Contrarian investors might want to start nibbling and look to add on further downside. The 7% yield pays you well to ride out the turbulence, and history suggests there will be better days ahead once the economy rebounds.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.

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