Bank of Nova Scotia (TSX: BNS) is down 15% in 2025 and has underperformed its large Canadian peers in recent years. Contrarian investors are wondering if Bank of Nova Scotia is now undervalued and good to buy for a self-directed TAX-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and long-term returns.
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Bank of Nova Scotia stock
Bank of Nova Scotia trades near $65 per share at the time of writing. The stock was as high as $80 late last year, but has given back most of the gains it racked up during the fall rally that occurred on the heels of interest rate cuts by the Bank of Canada and the U.S. Federal Reserve.
Bank stocks came under pressure through much of 2022 and 2023, when the central banks aggressively raised interest rates to get inflation under control. The sharp hike impacted many businesses and households with too much debt, forcing the banks to significantly increase provisions for credit losses (PCL). Fears that the rate hikes would trigger a recession also put pressure on the banks.
The recession didn’t materialize as expected. As soon as inflation fell to acceptable levels, the central banks began cutting interest rates in the hopes of navigating a soft landing for the economy. This drove the rebound in bank stocks last year.
Outlook
Weakness in 2025 is largely due to concerns that a global trade war will cause a worldwide recession. Bank of Nova Scotia is also in the middle of a strategy shift. The bank spent US$2.8 billion in 2024 to buy a 14.9% stake in KeyCorp, an American regional bank. The move gives Bank of Nova Scotia a platform to expand its U.S. presence. The other large Canadian banks have invested heavily in the United States in recent years. Bank of Nova Scotia is now joining the club.
The bank is also moving capital away from Latin America, where it has made big bets over the past 20-30 years. Investors are waiting to see how that will play out, especially after the sale of the assets in Colombia, Costa Rica and Panama earlier this year. Bank of Nova Scotia took a large charge on the deal. This might be why the stock has faced additional headwinds in recent months.
Opportunity?
Bank of Nova Scotia remains very profitable and has a solid capital position to ride out turbulence or make additional growth investments in the U.S. and Canada, where it sees potential for expansion. Big strategy shifts of this type take time to deliver results, but there is decent upside potential for investors if the new management team is successful. Bank of Nova Scotia traded as high as $93 in early 2022 before the extended pullback took it as low as $55 in later 2023.
Time to buy BNS stock?
Near-term volatility is expected, and additional downside is possible for the stock. However, contrarian investors might want to start nibbling at this level and look to add on further weakness. The current dividend yield of 6.45% pays you well to wait for the rebound.
