Yesterday, the Bank of Nova Scotia (TSX:BNS), better known as “Scotiabank,” released its earnings for the fiscal quarter ended April 31, 2024. The company beat expectations but its stock fell 0.9% anyway, likely due to sector-wide selling in banking stocks on the same day. TD Bank and Bank of America were down more than BNS on the day the latter’s earnings came out. If it hadn’t been a bad day for banking as a whole, then Scotiabank stock might have risen after its earnings came out.
With that being said, BNS took a worse beating than some other TSX banks on Tuesday. Royal Bank and Bank of Montreal declined less than Scotiabank did on that day. So, there was more to the story than just sector-wide weakness. In this article, I will explore the reasons why BNS stock sold off on Tuesday, starting with earnings.
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Earnings summary
One possible reason for Scotiabank stock selling off after earnings was the fact that the release, though ahead of estimates, nevertheless showed negative growth rates. For the quarter, Bank of Nova Scotia delivered the following:
- $8.34 billion in revenue, up 5.3% year over year
- $2.09 billion in net income, down 2.5% year over year
- $3.65 billion in net interest income, up 5.7% year over year but down 0.2% sequentially
- $1.57 in diluted earnings per share (EPS), down 6.7%
While the release beat expectations, the negative growth rates were concerning. Net interest income declined 0.2% compared to last quarter, at a time when NII is growing at banks in general. So, the earnings release appeared to show some sector relative underperformance.
Why Scotiabank fell after earnings
Although Scotiabank’s earnings beat expectations, the release wasn’t great in an absolute sense. Earnings declined, and net interest income declined sequentially, too. There wasn’t a lot to get all that excited about.
Nevertheless, Scotiabank has some things going for it.
First off, it has a 6.6% dividend yield, well covered with a 66% payout ratio. Scotiabank’s earnings declined slightly last quarter, but they would have to decline by truly extreme percentages for the dividend to become unsustainable.
Second, BNS is internationally diversified. Unlike other TSX banks, the Bank of Nova Scotia opted for Latin America rather than the U.S. for its international growth strategy. So, it offers a unique geographic play on a region that some think will grow rapidly in the years ahead.
Third and finally, Scotiabank has high capital and liquidity ratios, far above the minimums that regulators require. For example, its common equity tier-one (CET1) ratio is 13.2%, indicating that the bank has a lot of high-quality capital. In times of financial strain, such capital is important, and many think that Canada’s coming mortgage renewals will put the nation’s households under strain.
Foolish takeaway
On the whole, Scotiabank is an interesting enough stock. I would not be afraid to own it, but it isn’t the number one choice for me personally. It has lagged behind other TSX banks in terms of profitability and growth over the years, and it also has a lot of exposure to foreign exchange/currency swings. I’d say the 6.6% dividend is safe, but it may be the only return that investors see.
