Bank of Nova Scotia (TSX:BNS) is currently 2023’s worst-performing stock among the Big Five banks of Canada. After losing nearly 26% of its value last year, BNS stock currently trades with 9.7% year-to-date declines as of October 12, at $59.90 per share, trimming its market cap to $72.2 billion. By comparison, the TSX Composite Index has seen a minor 0.6% increase so far this year.
Before we look at some major fundamental factors that could drive Scotiabank stock in the next few years, let’s quickly find out what has possibly driven its share prices lower in the last nearly two years.
Why is BNS stock falling?
A big selloff in BNS stock, along with most other Canadian banks, started in the June 2022 quarter after rapid increases in interest rates in the United States and Canada took a big toll on investors’ sentiments, triggering a big market selloff. While the TSX Composite benchmark tanked 13.8% that quarter, BNS stock tumbled by 15%.
Early signs of easing inflationary pressures gave the Canadian stock market a chance to stabilize a bit in the next quarter, limiting the main TSX index’s losses to 2.2% in the September 2022 quarter. However, Scotiabank stock extended its losses by another 13.8% that quarter as investors worried that challenging market conditions and rapidly rising interest rates could affect the business of financial services companies and banks the most.
Since then, BNS stock has struggled to recover while going through a rollercoaster due mainly to an uncertain macroeconomic environment.
Have macroeconomic challenges really affected Scotiabank’s business?
On the one hand, it’s true to some extent that high interest rates tend to help banks increase their net interest income. On the other hand, a prolonged high-interest rate environment can badly affect consumers’ ability to borrow and spend, ultimately leading to lower profits even for large banks.
Let me give you a quick example of that. After the Bank of Canada and the U.S. Federal Reserve raised interest rates at a fast pace last year, Scotiabank’s total net interest income increased by 6.8% YoY (year over year) to $18.1 billion in its fiscal year 2022 (ended in October 2022). On the flip side, its overall non-interest income for the year declined by 6.9% YoY that fiscal year to $13.3 billion. Clearly, macroeconomic challenges did take a toll on Bank of Nova Scotia’s business last fiscal year.
Where will Scotiabank stock be in five years?
Based on its market cap, Scotiabank is currently the fourth-largest Canadian bank after Royal Bank of Canada, Toronto-Dominion Bank, and Bank of Montréal. While the ongoing market volatility and macroeconomic uncertainties might continue to affect its profitability in the next few quarters as well, these temporary challenges might not have a major impact on BNS’s long-term growth outlook due to its strong capital position and presence in international banking, along with its solid liquidity metrics.
Its robust balance sheet allows Scotiabank to increasingly reward its investors with reliable dividends. For example, despite macroeconomic concerns, the bank raised its dividends by 13% in its fiscal year 2022.
After losing nearly 33% of its value since the end of 2021, BNS stock has now delivered a 16.5% negative return in the last five years. While it’s not possible for anyone to exactly predict where its share prices will trade five years from now, Scotiabank’s solid business foundation and diversification strategy should help its stock rally sharply as soon as the ongoing round of interest rate hikes comes to an end, making it worth buying now to hold for at least the next five years.
