Bank of Nova Scotia (TSX:BNS) is down about 8% from the 2024 high. Investors who missed the big rally that occurred in the fall last year are wondering if BNS stock is now undervalued and good to buy for a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and total returns.
Bank of Nova Scotia stock price
Bank of Nova Scotia trades near $73.50 at the time of writing. It was as high as $93 in early 2022 and slipped as low as $55 in late 2023.
Interest rate hikes by the Bank of Canada and the U.S. Federal Reserve in 2022 and 2023 caused most of the downside movement in the bank sector. Investors worried that the steep increases in interest costs would lead to a recession and trigger a surge in unemployment and a spike in loan defaults.
Bank of Nova Scotia and its peers definitely saw an uptick in troubled loans and raised provisions for credit losses (PCL), as a result. The economy, however, held up well. The central banks managed to get inflation down below 3% without causing an economic crash. In fact, the economy and the jobs market in the United States remain robust. Canada saw unemployment drift higher last year, and the economy isn’t as strong as it is south of the border. However, the worst-case scenario that was feared by the market didn’t materialize in 2024.
In late 2023, the central banks indicated they were done raising interest rates. That provided the bottom for the pullback in bank stocks and led to the rebound that occurred last year, which picked up steam when the Bank of Canada and the U.S. Federal Reserve began to cut interest rates in the second half of the year.
Not all banks rallied at the same pace. Bank of Nova Scotia still trades about 20% below its 2022 peak, compared to new record highs recently reached by some of its peers.
Turnaround strategy
Bank of Nova Scotia brought in a new chief executive officer in 2023 to chart a different course for the business. Over the past five years, the stock has underperformed the other large Canadian banks. This is likely due to Bank of Nova Scotia’s big bets in recent decades on opportunities in Latin America.
The company acquired banks and credit card portfolios in Mexico, Peru, Colombia, and Chile, along with other countries in the region, with the idea of benefitting from the expansion of the middle class in highly populated markets where bank services penetration is low compared to Canada.
Unfortunately, the anticipated returns for shareholders have not materialized. Economic volatility due to the reliance of these markets on commodity prices, combined with political uncertainty, has led investors to prefer the other big Canadian banks that moved into the United States.
Looking ahead, Bank of Nova Scotia is shifting its growth investments to focus on the United States and Canada. The bank acquired a 14.9% stake in an American regional bank in 2024 for US$2.8 billion. Bank of Nova Scotia also created a new executive position last year to focus on expansion in Quebec.
Bank of Nova Scotia has also started the process of selling some of its assets in Latin America. The bank recently announced the sale of its operations in Colombia, Costa Rica, and Panama. Bank of Nova Scotia said it would take a charge of $1.4 billion on the deal. This hasn’t gone over well with the market and is largely the reason for the extended dip in the stock price to start 2025.
Time to buy?
Ongoing volatility should be expected, but contrarian investors might want to start nibbling at this level. The bank remains very profitable, and BNS stock currently provides a dividend yield of 5.75%, so you get paid well to wait for the turnaround plan to deliver results.
