Bank of Nova Scotia (TSX:BNS) is down 10% in 2025. Investors who missed the big rally near the end of last year are wondering if BNS stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and long-term total returns.
Bank of Nova Scotia stock
Bank of Nova Scotia trades near $69 per share at the time of writing compared to $80 at the end of November and as high as $93 at the top of the post-pandemic recovery.
The decline that occurred through most of 2022 and 2023 is attributed to higher interest rates. Central banks, including the Bank of Canada, raised interest rates aggressively to cool off a hot economy in an effort to get inflation under control. Bank of Nova Scotia and its peers had to raise provisions for credit losses (PCL) when borrowers with excess debt ran into trouble.
As soon as the Bank of Canada and the U.S. Federal Reserve indicated in the fourth quarter (Q4) of 2023 that they were done raising interest rates, bank stocks picked up a new tailwind. A recession hadn’t materialized, and markets started betting on rate cuts in 2024.
The surge in the share price in the fall of last year came as the Bank of Canada and the U.S. Federal Reserve cut interest rates to navigate a soft landing for the economy. Lower rates are helping businesses and households cover their debt obligations. As a result, bank investors expect PCL to trend lower in the coming quarters.
PCL at Bank of Nova Scotia, however, rose again to $1.16 billion in fiscal Q1 2025 compared to $1.03 billion in fiscal Q4 2024 and $962 million in FYQ1 2024. This indicates ongoing challenges for customers with too much debt.
Risks
A tariff-induced economic slowdown and a jump in unemployment could drive up loan losses and would force Bank of Nova Scotia and the other banks to set aside even more cash for potential defaults. At the same time, central banks might not be able to help much if they have to keep interest rates elevated to counter a jump in inflation as businesses pass through tariffs to consumers.
In this scenario, bank stocks could be in for a rough ride.
Bank of Nova Scotia’s share price decline in 2025 might also be due to concerns about the Latin American business. The bank spent billions of dollars over the past 20 to 30 years to build a large presence in Mexico, Colombia, Peru, Chile, and other markets in a bet on the potential expansion of the middle class. Economic and political volatility, however, have hindered the expected returns on these investments.
Bank of Nova Scotia sold its assets in Colombia, Costa Rica, and Panama earlier this year and booked a $1.36 billion impairment loss. Investors might be concerned that losses on other divestitures in the region could be on the way. The move is part of a strategy shift to allocate growth capital to the United States and Canada. Bank of Nova Scotia spent US$2.8 billion last year to take a 14.9% stake in KeyCorp, an American regional bank.
Positive news
Despite the increased PCL, Bank of Nova Scotia reported solid fiscal Q1 2025 results. Adjusted net income rose to $2.36 billion from $2.12 billion in fiscal Q1 2024. Adjusted earnings per share came in at $1.76 compared to $1.69. Return on equity was largely flat at a decent 11.8%. Bank of Nova Scotia finished fiscal Q1 with a common equity tier-one (CET1) ratio of 12.9%. This is a measure of the company’s capital position and is well above the minimum required by regulators.
Time to buy?
Investors will need to be patient for the turnaround plan to deliver results. Near-term volatility should be expected until there is clarity on the outcomes of trade negotiations between the United States and its neighbours. That being said, the stock probably reflects the risks right now, and investors get paid a solid 6.1% dividend yield to rise out the turbulence. If you have a contrarian investing style, this stock deserves to be on your radar.
