Down 30% Since Early 2022, Is Bank of Nova Scotia Stock Now a Buy?

BNS stock is starting to move higher amid a broader bank rebound. Is BNS stock still oversold?

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Bank of Nova Scotia (TSX:BNS) has underperformed its peers in recent years. A new chief executive officer is planning to turn the business around, and contrarian investors 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 focused on dividends and total returns.

Bank of Nova Scotia stock

BNS trades for close to $63 at the time of writing. This is actually up about 13% from the 2023 low, but still down about a third from the high the stock reached in early 2022 before the Bank of Canada and the U.S. Federal Reserve started to aggressively increase interest rates.

Created with Highcharts 11.4.3Bank Of Nova Scotia PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.ca

In normal economic conditions, the banks would typically benefit from rising interest rates because they can generate better net interest margins. However, in the past 18 months, the central banks have raised rates so much that investors have become increasingly concerned that the banks would be hit by a wave of loan defaults.

The Bank of Canada and the U.S. Federal Reserve are trying to get inflation down to 2%. This requires cooling off the economy. Driving up borrowing costs is the preferred way to slow consumer spending, but there is a risk that the rate hikes have been too quick and too large. It takes time for the increases in interest rates to work their way through the economy. Borrowers with variable-rate loans are impacted immediately, but households with fixed-rate mortgages don’t feel the pain until they have to renew.

Markets have worried that the economy could fall off a cliff rather than navigate a soft landing. If businesses are forced to cut staff in large numbers while households are still struggling with higher living costs and surging loan payments, there could be trouble on the horizon for the banks.

Bank of Nova Scotia and its peers have already increased their provisions for credit losses (PCL) to address the increase in troubled accounts, but the amount is still very small on a relative basis, and the overall loan portfolio remains in decent shape.

Ongoing volatility should be expected, but the market appears to be pricing in a much worse outcome than is predicted by economists.

Bank of Nova Scotia earnings

Bank of Nova Scotia expects earnings to be modestly higher in fiscal 2024 compared to this year. Adjusted net income came in at $8.44 billion in fiscal 2023. This was down from $10.75 billion in fiscal 2022.

The bank increased its common equity tier-one (CET1) capital ratio to 13% as of the end of October. The Canadian banks are required to have a CET1 ratio of at least 11.5%, so Bank of Nova Scotia is sitting on excess cash that will help it ride out any unexpected economic turbulence.

Outlook

Bank of Nova Scotia reduced its headcount by about 3% in recent months and booked some heavy charges in the fiscal fourth quarter of 2023 to make sure it starts fiscal 2024 with a clean slate as it continues to work through its strategic changes. The company will focus new investment on its Canadian, U.S., and Mexican operations while looking for ways to reduce costs in the remaining international businesses, primarily located in Peru, Chile, and Colombia. Investors might even see the bank exit the three markets over the medium term if performance doesn’t improve.

Dividend

Bank of Nova Scotia raised the dividend in 2023. Investors can currently get a 6.7% yield on the stock.

Is BNS stock undervalued?

It will take time for the strategic shift to bear fruit, but investors might want to start adding BNS stock to their portfolios while it is still out of favour. The upside potential is significant on a rebound, and investors get paid well to wait for the recovery.

Should you invest $1,000 in goeasy right now?

Before you buy stock in goeasy, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and goeasy wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

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.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Bank Stocks

open vault at bank
Bank Stocks

3 Canadian Bank Stocks to Shield Against Market Downturns

Canadian bank stocks are some of the best options on the market, and these three are probably the top ones.

Read more »

calculate and analyze stock
Bank Stocks

1 Canadian Stock Down 7% to Buy and Hold for a Long Haul

Now is the time to take advantage of this top-notch Canadian stock, buying it while it's still down.

Read more »

A worker drinks out of a mug in an office.
Bank Stocks

Royal Bank of Canada: Buy, Sell, or Hold in 2025?

Royal Bank is down 6% in 2025. Is it time to buy the dip?

Read more »

chart reflected in eyeglass lenses
Stocks for Beginners

Seize the Dip: Investment Opportunities Await This April

If you're looking for one and only one opportunity during a market dip, buy this top stock.

Read more »

hand stacks coins
Bank Stocks

Here’s How Many Shares of IGM Financial You Should Own to Get $1,000 in Yearly Dividends

Besides its attractive dividend income, IGM Financial’s strong long-term growth fundamentals could help its stock outperform the broader market in…

Read more »

A person looks at data on a screen
Bank Stocks

Where Will Bank of Montreal Stock Be in 5 Years?

These factors give Bank of Montreal (TSX:BMO) stock the potential to outperform the broader market in the next five years.

Read more »

calculate and analyze stock
Bank Stocks

Where Will TD Stock Be in 3 Years?

Here are some key reasons why I expect TD stock to reward patient investors handsomely over the next three years.

Read more »

Pile of Canadian dollar bills in various denominations
Bank Stocks

1 Dividend Stock Down 10.2% to Buy Now for Lifetime Income

A high-yield stock with a nearly 200-year dividend track record is a screaming buy right now.

Read more »