Scotiabank (TSX:BNS)(NYSE:BNS), a former market darling, has been treading water lately, with shares entering bear market territory (a 20% peak-to-trough decline) for the second time over the past year. It’s hard to believe that the Big Five bank peaked in the autumn of 2017, and with no signs of slowed negative momentum, does it still make sense to be an owner of Canada’s most international bank? Or is it finally time to throw in the towel?
Sluggish macro outlook ahead
Investors, in aggregate, are pretty pessimistic when it comes to the Canadian banks as a whole. But really, who can blame them? They’ve been labelled with “hold” ratings, capital market activity remains underwhelming, expenses are creeping up, provisions are soaring, and net interest margins are slipping.
Where others see enough to hit the sell button, I see opportunity. Yes, the banks aren’t in for a pop anytime soon, but the valuations reflect that, and if you’ve got patience, there are bargains to be had for those who aren’t just looking for a way to make a quick buck.
Fortunately for value investors, Scotiabank sports a hefty 5.1% dividend yield, which should be more than enough incentive to hang in for the ride. But in addition to the weak macro environment, there’s baggage that’s unique to Scotiabank that investors need to be aware of before they begin backing the truck up on the stock.
How much longer will Scotiabank be in the penalty box?
Scotiabank has been one of the hardest of hit bank stocks thanks in part to recent acquisitions that have introduced more risks at what appears to be the worst possible time — as the banks transition into the next credit cycle.
Higher provisions have plagued Scotiabank, like many of its peers, but the real gut-punch to Scotiabank is the expenses that’ll need to be managed appropriately if the stock is to stop bleeding. Scotiabank is already deemed as a “riskier” banking bet due to its emerging market exposure, but the now discounted stock price already reflects this.
Moving forward, more pain is likely in the cards given the lack of near-term catalysts. But given that, I don’t think it’s a bad idea to start accumulating shares now while everybody is fearful going into yet another season of bank earnings.
The bank trades at just nine times forward earnings, and given Scotiabank’s somewhat promising track record of mitigating risks from its international segment; I think the stock will rocket higher when the tides finally turn in its favour. For those patient enough to wait, there’s a significant dividend to collect while the managers at Scotiabank look to prep for another wave of soured loans.
Stay hungry. Stay Foolish.
