Canada is well-known for its banking sector, with the so-called “Big Five” dominating the domestic financial industry. Of Canada’s top banks, I’ve long touted Bank of Nova Scotia (TSX: BNS) as a buy, but there are reasons why so many investors are cautious right now.
Regional banking crises in the U.S. tied to commercial loans have some investors betting on a period of low returns in this sector. Combined with overly-indebted households, mortgage lending may be less attractive right now.
With that said, let’s dive into whether Scotiabank is a buy, sell, or hold in this current environment.
A strong business model
There’s one reason why many bulls continue to focus on Scotiabank relative to its Canadian banking giant peers. That’s the company’s diversified business model.
Focused on its core domestic Canadian market (of course), Scotiabank also has a strong international presence, serving many Central and Latin American countries. This has allowed the bank to produce impressive growth relative to its peers and lays out a long-term growth roadmap other banking institutions simply don’t have.
The company’s core Canadian banking business remains robust, as does its global markets and wealth management divisions. But it’s Scotiabank’s international exposure that appeals to me. So long as these cash flows are well-hedged, I think the bank should outperform its peers. And a 6.3% dividend yield remains one of the best in the sector. Indeed, as far as dividend stocks are concerned, Scotiabank’s current yield is among the most attractive of the bunch.
Is Scotiabank a buy, sell, or hold?
From a financial perspective, there’s a mixed picture when it comes to Scotiabank right now. The company’s earnings per share dropped to $1.69 from $1.84, though total revenue did climb nearly 6% year over year. Thus, this is a bank that’s seeing some earnings headwinds, largely tied to provisions for loan losses that many see as likely to grow in the coming quarters.
I think that certainly could be the case. But the stock’s high yield does put some floor beneath how low it can go. Like its mega-bank peers, Scotiabank will be keen on keeping its distribution at least steady, if not raising its dividend, over time. Thus, this is a company with a strong balance sheet and a stock price reflecting weakness. On that basis, Scotiabank could be a cautious buy for value investors.
Personally, I’m rating Scotiabank as a hold right now, given the aforementioned headwinds in this space. Things will improve in the banking world, but for now, I’m going to take a cautious stance.
