Bank of Nova Scotia (TSX:BNS) is working through a strategy shift with the goal of improving returns for shareholders. Contrarian investors are wondering if BNS stock is undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividends and long-term gains.
Bank of Nova Scotia stock
Bank of Nova Scotia trades near $74 at the time of writing. The stock is up about 20% in the past year but is still way off the $93 it reached three years ago and has underperformed its large Canadian peers over the past five years.
Canadian bank stocks often move as a group, depending on the economic conditions. They rallied together after the 2020 crash and pulled back as a group through 2022 and much of 2023 as the Bank of Canada and the U.S. Federal Reserve aggressively raised interest rates to get inflation under control.
In late 2023, when the central banks signalled they were done hiking rates, bank stocks started to rebound. The size of the gains, however, has varied considerably. Royal Bank, CIBC, and National Bank have all soared to new highs, and Bank of Montreal is close to doing the same. TD’s issues in its American business have held it back, but the stock is still up 11% over the past five years, compared to a 1% gain for Bank of Nova Scotia.
Strategy shift
Bank of Nova Scotia placed big bets on Mexico, Peru, Colombia, Chile, and other countries in Latin America over the past 20 to 30 years. The idea was to take advantage of the low penetration of banking services in markets that had the potential for significant middle-class growth. The strategy makes sense, but political turbulence and reliance on commodity markets for revenue make these countries higher-risk places for the bank to do business compared to the United States, where some of the other Canadian banks have invested for growth.
Bank of Nova Scotia brought in a new chief executive officer in 2023 to chart a new course. The bank trimmed staff by about 3% to reduce expenses and is shifting growth investments to the United States and Canada. In 2024, Bank of Nova Scotia spent US$2.8 billion to buy a 14.9% stake in KeyCorp, an American regional bank. The deal gives Bank of Nova Scotia a platform to expand its U.S. presence. Bank of Nova Scotia is also eyeing expansion in Quebec with its creation of a new executive position to pursue growth in the province.
The unwinding of the Latin American investments is also underway. Bank of Nova Scotia recently announced it is selling its businesses in Colombia, Panama, and Costa Rica.
Earnings
Bank of Nova Scotia delivered solid fiscal 2024 results compared to the previous year. Adjusted net income rose from $8.4 billion to $8.6 billion, diluted earnings per share were essentially flat, and return on equity slipped slightly to 11.3% from 11.6%. The bank finished fiscal 2024 with a common equity tier-one capital ratio of 13.1%, so it has ample capital to ride out some turbulence or to make additional acquisitions.
Time to buy?
The impacts of a potential trade war could be significant for Bank of Nova Scotia and its peers, and near-term volatility should be expected until there is more clarity on the direction of interest rates in 2025, so investors might want to spread out their purchases of the stock.
That being said, contrarian investors who think the strategy shift will deliver results might consider starting a position at the current level for a buy-and-hold portfolio. Investors can pick up a decent 5.7% dividend yield while they ride out the potential volatility.
