Something unusual is going on with Bank of Nova Scotia’s share price this year: It’s outperforming.
That may come as a relief to long-suffering shareholders who have seen the share price trail the other Big Six bank stocks by an average of 49 percentage points over the past five years, to the end of 2023. And it could offer nimble investors a reason to look again at a bank stock that stands out for looking cheap.
Okay, we are talking about a mere two months of peer-beating gains, which might not be enough to establish a clear trend. As well, slim gains of just 1.7 per cent over this period, to Thursday’s close, doesn’t exactly establish Scotiabank as a ripping momentum play just yet.
Still, it is one of only three Canadian big bank stocks in positive territory in 2024 – Canadian Imperial Bank of Commerce and top-performer National Bank of Canada being the other ones. It is well ahead of Bank of Montreal, Toronto-Dominion Bank and Royal Bank of Canada, which have slumped 6.8 per cent, 5.3 per cent and 2 per cent, respectively, this year.
Even a glimmer of hope that Scotiabank may be on the way to delivering satisfying returns is worth exploring, because this is a stock whose beaten-up valuation offers rebound potential.
Where is this glimmer of hope coming from? The bank’s latest quarterly financial results, released this week, delivered several upbeat figures that may be pointing the way toward good times.
Adjusted profit, the figure widely used by analysts because it reflects a bank’s regular operations, was $1.69 per share. That was above the $1.61 that analysts, on average, had been expecting, according to Refinitiv.
Another impressive figure: Profit from the bank’s international banking division increased by 35 per cent from the previous quarter, giving investors a reason to embrace Scotiabank’s operations in Mexico, Colombia, Chile and Peru.
Some of the bank’s nerdier financial metrics also looked promising. Revenue from Scotiabank’s Canadian banking division expanded faster than expenses, resulting in positive operating leverage.
And the bank’s net interest margin, which reflects profit from mortgages and other loans, increased during the quarter, offsetting flatlining lending activity.
In particular, margins increased to a multiyear high of 2.56 per cent in the Canadian banking division during the quarter, up from 2.26 per cent in the same period last year.
The difference, a substantial 0.3 of a percentage point, marks the biggest year-over-year increase of the past five quarters and translates into fatter profits on the bank’s Canadian assets of $445-billion.
“This isn’t a strategic turning point for the bank – there is still a long road ahead – but it could be a financial turning point,” Paul Holden, an analyst at CIBC Capital Markets, said in a note.
The best part about Scotiabank’s financial results is that they follow low expectations among investors.
The share price is roughly where it was a decade ago. In terms of valuation, the stock trades at just 10.7 times trailing earnings, making it the cheapest among the Big Six on this metric. Based on estimated 2024 earnings, the stock’s price-to-earnings ratio is 10, which trails the peer average.
The stock also sports the highest dividend yield among the biggest banks, at 6.5 per cent. That’s well above an average of 4.8 per cent among its five peers, and adds to Scotiabank’s neglected appearance – and its appeal for investors counting on a sustained rebound.
These are early days, of course, and the rebound will have to navigate several potential obstacles. Banking in emerging market economies can be volatile, especially during an era with high interest rates and a strong U.S. dollar.
As well, Mr. Holden warns that Scotiabank is more sensitive than its peers to loan losses when the credit cycle is on a downswing. That could weigh on its profits, given that Canadian banks are setting aside big bucks in anticipation of defaults from rising mortgages and wobbling commercial real estate.
Lastly, the bank is operating under a relatively new chief executive officer, Scott Thomson, who unveiled a fresh strategic direction in December. You can’t blame investors for taking a wait-and-see approach until the plans start showing results.
But if Scotiabank’s outperforming stock is any indication, some investors may be gaining confidence in the bank’s ability to turn things around.
The nice part about investing in a stock mired in low expectations is that any improvement is good news. For Bank of Nova Scotia to become the best-performing bank stock, it may only need to become a better bank.