Is Scotiabank Stock a Buy?

Is Bank of Nova Scotia (TSX:BNS) stock a buy after reporting fourth-quarter 2024 earnings? Motley Fool Canada Chief Investment Officer Iain Butler shares what he looks for in bank earnings releases and his take on whether BNS stock is an investment worth buying today.

Prefer to read? There’s a transcript below.

Transcript

Nick Sciple: I’m Motley Fool Canada senior analyst Nick Sciple, and this is the “5-Minute Major,” here to make you a smarter investor in about five minutes. Today, we’re here to discuss Scotiabank’s fourth-quarter 2024 earnings release.

My guest today to help me do that is Motley Fool Canada Chief Investment Officer Iain Butler. Iain, thanks for joining me once again.

Iain Butler: Awesome to be here, Nick, as always.

Nick: Scotiabank shares are down about 3% this week following the earnings release on December 3. Iain, what was your takeaway from the results?

Iain: Well, anytime I see bank results, my mind immediately goes to just how complicated these earnings releases are. I don’t think it gets any more complex than a Canadian bank when it comes to these releases. There’s just numbers after numbers after numbers and layers and layers and layers.

Sprawling enterprises with loads of intricacy.

And I truly do feel for the people that have to comb through these results with any degree of precision.

That’s not what we’re here to do. And we’re going to speak in fairly broad strokes. And I might just start with how I do think about these bank earnings.

What to look for in bank earnings

I tend to consider a handful of markers: bank profitability, as measured by return on equity; bank growth, as measured by year-over-year change in book value; bank solvency, as measured by the Tier 1 capital ratio; loan development, so how the loan book is progressing as the economy ebbs and flows — so loan development as measured by provisions for credit losses. And then bank valuation, as measured by the price-to-book ratio.

But again, we are here top of the waves. We’ve got less than three and a half minutes to go. So rather than evaluating each of these, we’re going to stick to bank profitability and bank valuation.

Scotiabank’s profitability and valuation

To look at Scotia’s return on equity, the current number is 10.2% for fiscal 2024. That compares to a 10-year average of 12.7%, so a little less profitable than they’ve been over the past decade on average.

Their price-to-book ratio, though, is currently at 1.3 times, and their 10-year average is 1.39 times.

So Scotia is a little bit cheaper than it has been on average over the past 10 years. And then just to sort of square a circle here, one more quick and dirty check that we haven’t mentioned, but it falls into the valuation bucket, is the dividend yield. So Scotia’s current dividend yield is 5.31%. The 10-year average is 5%. So again, that reads as Scotia being a little bit cheaper than it’s been over the past decade.

Is Scotiabank stock a buy?

To summarize that, Scotia is a little less profitable than over the past 10 years and a little cheaper.

The thing is, when we’re evaluating companies to invest in, that combination doesn’t tend to be where opportunity lives. What’s preferable is if there is some discrepancy between the two.

Ideally, we’d have something that’s a little less profitable, but a lot cheaper. Or more profitable and a little bit cheaper. So things are lining up too well at Scotia. And I kind of come away from that saying it looks pretty fairly priced. Not expensive, not cheap.

Nick: So when I hear that, I hear this is a company that needs to show me some results on the top or bottom line, some progress for there to be a case for the stock to really start moving and singing for investors. And I think Scotia might agree with that. The bank’s financial results remain well below the bank’s medium targets. Maybe that’s some of those things that can get the profitability engine moving. Do you think they can still get there? Do you think those targets are realistic for the company? What could that mean for the business looking out in that medium term?

Iain: Yeah, totally. And I think that’s a great way to extend on those last points, that’s indeed where things could get interesting. And I think we’ve lived with Scotia and experienced Scotia go through these stretches where there’s been a differentiation coming into 2024. It traded at book value, and profitability was pretty much pretty similar to what it is now. So that’s attractive. And indeed, it’s been one of the best-performing banks this year.

So if we do stick to return on equity, Scotia has a medium target of achieving a 14% return on equity. It’s been there before historically. It’s been over 20% historically. I don’t know if we can get there. But what that does is provide a great signpost for us to gauge the performance of the business and compare it to how the stock performs from here. So if we see Scotia, the business, moving towards 14% ROE, or achieving that target and the valuation remains as is, that becomes interesting. It’s growing. It’s a profitability, yet it’s remaining similarly valued. It means the market’s not recognizing that improved business quality that we’re getting. So that’s the kind of discrepancy we’re looking for.

And the great thing is a business of this size doesn’t just snap a finger and boost its profitability like that. This is a tanker ship turning, and we’re going to have time. So we’re going to keep our eyes on the situation, see how the bank performs and compare that to how the stock performs. And it might become a very interesting buy opportunity should a discrepancy arise.

Nick: One of the biggest, most important companies in Canada. Going to continue to follow the company. Hopefully the stock becomes more attractive to us in the future for one reason or another. Maybe the stock will get a little bit cheaper. Maybe the company will start to enjoy a little bit higher earnings. Until next time, Iain, thank you for joining us. for this edition of the “Five-Minute Major.” Hopefully we’ll see everybody next time.

Iain: Awesome. Thanks, Nick.