Bank of Nova Scotia (TSX: BNS) is up about 28% in the past year. Dividend investors are wondering if BNS stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
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Bank of Nova Scotia stock
Bank of Nova Scotia trades near $75 per share at the time of writing. Investors who bought BNS around $55 last October are already sitting on nice gains. The stock was as high as $93 in early 2022 before central banks started to aggressively raise interest rates in an effort to get inflation under control, so there could be more upside.
The sharp rise in interest rates triggered fears in the market that the central banks would have to drive the economy into a deep recession to get inflation back down to the 2% target. This led to the drop in share prices in the bank sector that occurred through 2022 and much of 2023.
The turnaround began last fall when sentiment shifted from fears of more rate hikes to anticipation of rate cuts. Bargain hunter also sensed that the economy was going to hold up, despite the pressures on households and businesses. Banks, including Bank of Nova Scotia, have increased their provisions for credit losses (PCL) due to more clients running into troubles with higher interest charges. However, the overall loan book remains solid and unemployment has not spiked, which was an earlier concern.
Now that the Bank of Canada and the U.S. Federal Reserve are cutting interest rates, investors should see PCL level off in the next few quarters. If the economy stays healthy and interest rates decline through next year, banks might even shift to PCL reversals, as occurred after the pandemic crash when borrowers avoided defaulting on loans that the banks had identified as at risk.
Risks
Donald Trump plans to implement broad-based tariffs of at least 10% when he moves back into the White House next year. This could drive up inflation in the United States and would potentially put strains on the Canadian economy. In that scenario, interest rates could remain elevated for longer than expected in the United States, likely forcing the Bank of Canada to slow down its pace of rate cuts. This would extend financial pressure on businesses and households. In Canada, people who bought houses in 2020 on five-year fixed-rate mortgages with historically low interest rates will have to renew at higher rates in 2025. If unemployment spikes at the same time, Bank of Nova Scotia and its peers could see defaults move higher.
Opportunity
Bank of Nova Scotia’s new chief executive officer cut staff by about 3% last year to reduce expenses and has shifted the growth program away from South America to the United States and Canada. Management recently announced an investment of US$2.8 billion to take a 14.9% stake in KeyCorp, a U.S. regional bank. The move gives Bank of Nova Scotia a platform to expand in the American market. Bank of Nova Scotia has also created a senior executive position to lead an expansion in Quebec where the bank wants to increase its presence.
Time to buy BNS stock?
Volatility is expected in the coming months, but BNS stock should be attractive right now for a buy-and-hold dividend portfolio. Investors who buy BNS stock at the current level can get a solid 5.7% dividend yields and simply wait for the new growth strategy to deliver results. Pullbacks would be an opportunity to add to the position.
