Bank of Nova Scotia (TSX:BNS) is up 20% in the past 12 months. Investors who missed the 2024 rally 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) focused on dividends and total returns.
Bank of Nova Scotia share price
Bank of Nova Scotia trades near $77 per share at the time of writing compared to $61 in August, but the stock is still well below the $93 it reached in early 2022 during the first phase of the rebound in bank stocks after the pandemic crash.
The pullback through 2022 and much of 2023 sent the stock as low as $55. During that time, investors worried that rising interest rates designed to get inflation under control would trigger a recession and drive up loan defaults.
Looking back, the fears might have been overdone. The Canadian economy actually held up reasonably well over the past two years. This limited the rise in bankruptcies, but Bank of Nova Scotia and its peers still saw more customers getting into trouble as higher rates pushed up interest charges.
In the second half of 2024, the Bank of Canada and the U.S. Federal Reserve started to reduce interest rates. That’s largely why Bank of Nova Scotia’s share price rebounded sharply through the final months of the year. Economists broadly expect the central banks to continue to cut interest rates in 2025 to help the economy navigate a soft landing. This is particularly the case in Canada, where unemployment drifted higher in 2024.
If unemployment remains close to its current level in Canada through 2025, there should be a downward trend in provisions for credit losses (PCL) at Bank of Nova Scotia in the coming quarters. That would support profits and should be bullish for the stock.
Risks
Donald Trump intends to place new tariffs on all goods entering the United States. In the event that he follows through on the plan, there could be a negative impact on the Canadian economy. A decline in trade could force Canadian exporters to trim staff.
A jump in unemployment might lead to a wave of loan defaults at the banks, even as interest rates continue to decline. Mortgage rates are still high compared to 2020 and 2021, when many homeowners took out five-year loans. As such, provisions for credit losses (PCL) could stay elevated or even move higher in 2025 and 2026. This would likely lead to another pullback in the bank sector.
Opportunity
Bank of Nova Scotia remains very profitable and has a strong capital position to ride out additional turbulence. The new chief executive officer is shifting the growth focus to the United States and Canada, compared to the previous strategy of building a presence in Latin America. It will take some time for the efforts to deliver results, but investors get paid well to wait. At the time of writing, BNS stock provides a dividend yield of 5.5%.
Time to buy?
Income investors should be comfortable owning the stock at this level and could use any new weakness as an opportunity to add to the position. Investors who are more focused on total returns and are concerned about the uncertainty of the tariff threats might want to wait for a better entry point.
