Did the Bank of Nova Scotia (TSX:BNS) Warn Us About a Recession?

On Tuesday, the Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) released mixed fourth quarter results.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Bank earnings season is always one of the most anticipated times of the year. The S&P/TSX Composite Index has enjoyed a solid year, up 18.72% thus far. The rebound from last year’s double-digit drop is particularly impressive given the uncertainty of the economic backdrop.

The quarterly results of Canada’s big banks are heavily scrutinized, as they offer a unique perspective on the Canadian economic picture. As primary money lenders, they can provide insight into consumer and business borrowing activity.

When demand for borrowing softens, it is usually a sign that the markets are fearful of a potential recession. Likewise, as Canada’s debt burden continues to hover around record highs, a higher than expected provision for credit losses can be a sign that consumers have reached peak borrowing.

On Tuesday, the Bank of Nova Scotia was the first of the Big Five to report earnings. All four of its Big Five peers don’t report until the first week of December. Can the Bank of Nova Scotia’s fourth-quarter results provide insight as to what to expect next week? Let’s take a look.

Decent, yet nothing to get excited about

The Bank of Nova Scotia posted mixed fourth quarter results. Earnings of $1.82 per share met expectations while revenue of $7.97 billion missed estimates by $10 million. It wasn’t a big miss, and revenue still increased by 7% over the fourth quarter of 2018.

Earnings per share crept up by a mere 1.15% and the company’s return on equity (ROE) fell by 50 basis points to 13.3%. For the year, adjusted earnings grew by 0.4% and ROE dropped by 100 basis points. It appeared to be a disappointing year for the company.

The company missed on three of its four mid-term objectives – earnings growth of 7%, ROE of +14% and positive operating leverage. As we’ve seen, earnings and ROE missed by a large margin, while its adjusted operating leverage came in at negative 2.1%. The only objective it met was to maintain a strong CET ratio (11.1%).

It wasn’t all bad, however. The company has been in transition as it attempts to exit some ill-fated acquisitions. It is focused on streamlined international operations and in 2019, it bought back 15 million shares for cancellation.

Of particular importance is the performance of its Canadian retail banking segment. On the positive side, total revenue jumped by 3.5% over the fourth quarter of 2018.

On the negative, PCL continued its upward trend. Year over year, it jumped by 24% and for the full year, PCL increased by 22.8% to $972 million, up from $794 million in 2018.

Although it remains an ongoing concern, it is important to note that PCL accounts for a very small percentage of outstanding loans. Despite an increase of three basis points, year-end PCL accounted for only 0.51% of total loans, which is well within an acceptable range.

Foolish takeaway

The Bank of Nova Scotia’s transition to a more focused bank is a positive. Unfortunately, it is having a short-term impact on results as its global banking segment continues to be a drag on results.

On the bright side, Canadian and business consumer loan growth was strong, pointing to continued confidence in the economy. Although a rise in PCL is worth monitoring, it’s not yet pointing to significant troubles ahead.

Should you invest $1,000 in The Bank of Nova Scotia right now?

Before you buy stock in The Bank of Nova Scotia, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and The Bank of Nova Scotia wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor mlitalien has no position in any of the stocks mentioned. The Motley Fool recommends BANK OF NOVA SCOTIA. Bank of Nova Scotia is a recommendation of Stock Advisor Canada.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

grow money, wealth build
Dividend Stocks

Why I’d Invest $10,000 in This Undervalued Dividend-Growth Stock for Decades of Income

This undervalued dividend stock offers a high yield of over 8% and can help you earn more than $200 in…

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Here’s Exactly How a $20,000 TFSA Could Potentially Grow to $200,000

Index funds like the iShares S&P/TSX Capped Composite Index (TSX:XIC) are tax free in a TFSA.

Read more »

Dividend Stocks

How I’d Invest $6,000 in Canadian Real Estate Stocks to Build Lasting Wealth

Canadian REITs on sale! See how grocery-anchored retail properties offering 9% yields could turn $6,000 into lasting wealth despite US…

Read more »

rain rolls off a protective umbrella in a rainstorm
Dividend Stocks

Economic Headwinds: Should You Still Consider Buying the Dip?

A market dip might seem like a bumpy road, but it can be far smoother in the future with the…

Read more »

e-commerce shopping getting a package
Dividend Stocks

Consumer Spending Plays Amidst the Current Market Dip

Consumption may go down in market dips, but certain consumer stocks are certainly better off than others.

Read more »

Asset Management
Dividend Stocks

12% Dividend Yield! I’m Buying This TSX Stock and Holding for Decades

Stocks with high-dividend yields carry risks. But they could be a good long-term investment. Here is a 12% dividend stock…

Read more »

Canadian flag
Dividend Stocks

How I’d Build a Foundation of Canadian Value Stocks in My Investment Strategy

Canadian investors can explore iShares Canadian Value Index ETF for value stock ideas to build a foundation for their diversified…

Read more »

Canadian dollars are printed
Dividend Stocks

How I’d Transform a $30,000 TFSA Into a Cash-Flow Machine

Here's why TFSA investors should consider owning dividend stocks such as Mullen Group in 2025.

Read more »