Bank of Nova Scotia (TSX:BNS) is down more than 10% in 2025. Investors who missed the rally that occurred in the fourth quarter (Q4) last year are wondering if BNS stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividends.
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Bank of Nova Scotia share price
Bank of Nova Scotia trades near $69 per share at the time of writing. The stock rallied from $62 in August to as high as $80 in November before going into a new slide over the past few months.
Bank stocks broadly rebounded in the final quarter of 2024 as the Bank of Canada and the U.S. Federal Reserve cut interest rates. Lower interest charges ease pressure on business and households that are carrying too much variable-rate debt and reduce the renewal rate on fixed-rate loans. Bank of Nova Scotia and its peers had to raise provisions for credit losses in 2023 and 2024 as higher interest rates took a toll on some borrowers.
The rally stalled out late last year as markets started to price in fewer rate cuts for 2025 than previously expected. Inflation remains sticky in the United States and Canada. Widespread tariffs could push inflation higher this year. The Bank of Canada recently cut rates again to try to help the economy despite a jump in inflation. South of the border, the U.S. central bank is on hold until it sees how tariffs will impact economic activity and inflation.
Risks
A recession could drive up unemployment in Canada this year. At the same time, interest rates might not come down as fast as would otherwise be warranted due to higher inflation. In a scenario where households are losing income while facing mortgage renewals at higher rates, there could be a wave of defaults that would force the Canadian banks to book more loan-loss charges.
Strategy shift
Bank of Nova Scotia has underperformed its large Canadian peers over the past five years. This is likely due to investors being uncomfortable with the international business that is heavily focused on Latin America. Bank of Nova Scotia built a large presence in Mexico, Peru, Colombia, and Chile over the past two or three decades. The goal was to tap into low banking penetration and the expansion of the middle class. Shareholders, however, have not seen the anticipated rewards, and Bank of Nova Scotia is now shifting growth investments to Canada and the United States.
The bank recently sold its operations in Colombia, Costa Rica, and Panama. Last year, Bank of Nova Scotia spent US$2.8 billion to buy a 14.9% stake in a U.S. regional bank. The growth transition will take some time to deliver results.
Should you buy BNS now?
Near-term volatility should be expected. A trade war with the United States could put both the Canadian and Mexican economies in a difficult situation. If a recession occurs, the stock could retest the 12-month low before the end of the year.
That being said, income investors can currently get a 6% dividend yield on BNS stock, so you get paid well to ride out the turbulence. Contrarians might want to start nibbling and look to add to the position on more downside. Patience is required, but there is potential for decent long-term returns.
