Bank of Nova Scotia (TSX:BNS) picked up a nice tailwind in recent weeks. Investors who missed the bounce are wondering if BNS stock is still undervalued and good to buy for its dividend heading into 2025.
Bank of Nova Scotia stock
Bank of Nova Scotia trades near $72 at the time of writing compared to $61 in August. The stock was as low as $55 in late October last year but is still way off the $93 it reached in early 2022 during the first post-pandemic rebound.
The weakness that occurred through 2022 and 2023 is largely due to the sharp rise in interest rates that occurred as the Bank of Canada and other central banks raced to get inflation under control. In normal conditions, rising interest rates are good for banks as they help boost net interest margins. The steep increase in rates over such a short period of time, however, caught many businesses and households off guard. Those with variable-rate loans immediately saw their interest charges jump. Fixed-rate mortgage holders had some protection until their loans came up for renewal, but most mortgage rates are now much higher than rates secured on the original loans. This pressure on clients who are carrying too much debt is the reason Bank of Nova Scotia has increased its provisions for credit losses (PCL) in recent quarters. As a result, profits have taken a hit.
Bank of Nova Scotia reported PCL of $1.05 billion for the fiscal third quarter (Q3) 2024 compared to $819 million in the same period last year, and charges of $3.02 billion for the first three quarters of fiscal 2024 compared to $2.17 billion for the same period the previous year.
Opportunity
The Bank of Canada has reduced interest rates by 0.75% in the past few months and is expected to continue to lower rates through next year. This will ease pressure on borrowers. PCL should start to decline in early 2025, and investors could even see PCL reversals later next year or in 2026 if the economy holds up.
On the growth side, Bank of Nova Scotia’s new strategy will focus more on the United States, Canada, and Mexico. The bank recently announced a US$2.8 billion investment to take a 14.9% stake in KeyCorp, a U.S. regional bank. Bank of Nova Scotia is also planning to expand its presence in Quebec, where it sees good growth potential.
The bank has reduced its capital deployment to the South American operations in Colombia, Peru, and Chile. At some point, Bank of Nova Scotia might decide to monetize these assets and allocate the funds to other opportunities.
Risks
The markets are currently assuming there will not be a meaningful recession and that inflation is now fully under control. In the event that the economy goes into a deep slump or if inflation spikes again, the stock could give back a good chunk of the recent gains.
As long as the economy navigates a soft landing and unemployment remains near current levels, the stock should trend higher on continued cuts to interest rates in Canada and the United States.
Dividends
Bank of Nova Scotia remains very profitable and has a solid capital position. At the very least, the dividend should be safe. Investors who buy the stock at the current level can get a dividend yield of 5.9%.
Time to buy BNS stock?
Near-term volatility should be expected. Markets are near all-time highs, even as geopolitical risks escalate and economic uncertainty remains in place heading into next year. Given the sharp spike in the share prices of banks in the past two months, a pullback wouldn’t be a surprise.
That being said, BNS stock looks attractive at this level for a buy-and-hold portfolio. Existing shareholders should probably stay invested. New investors might want to take a half position and look to add on weakness. The generous dividend yield pays you well to ride out additional turbulence.
