The Bank of Nova Scotia (BNS), also known as Scotiabank, could be a great investment for investors looking to add stability to their portfolios.
It is a Canadian Bank that serves 25 million customers around the world. It operates through four segments: Canadian Banking, International Banking, Global Banking and Markets, and Global Wealth Management.
We are bullish on The Bank of Nova Scotia. (See Analysts’ Top Stocks on TipRanks)
What We Like about BNS
Bank of Nova Scotia is one of the “Big Five” Canadian banks. As a result, it operates in an oligopoly as the third-largest Canadian bank by assets and market cap.
Canadian banks have a reputation for being some of the most resilient in the world. During periods of economic crises, they tend to be less volatile than the overall market.
Therefore, betting on a bank such as BNS is a relatively safe way of growing wealth over the long term.
Valuation
We will value BNS using a dividend discount model. To demonstrate the stock’s value, we will use a single-stage DDM. Our assumptions are as follows:
- Equity risk premium: 4.7%
- Risk-free rate: 1.55%
- Beta: 0.83
- Cost of Equity: 5.45%
- Perpetual growth rate: 2.1% (set to the 30 year U.S. government bond yield)
- Dividend per share: $2.84
Fair Value = 2.84 ÷ (0.0545 – 0.021)
Fair Value = $85.78 per share
As you can see, BNS is trading under fair value if we simply assume a 2.1% percent growth rate using the current discount rate. We believe it is likely to grow faster than that.
Growth Catalysts
As the economy eventually recovers to pre-pandemic levels, it’s expected that interest rates will eventually increase. This is especially true if inflation continues to run hot longer than expected.
We expect Scotiabank to benefit from a rise in interest rates going forward. This is because it will receive higher interest payments from government treasury bills on customer deposits.
In addition, it will be able to charge more for loans. This will potentially lead to higher net interest margins if the company’s cost of borrowing doesn’t rise as fast.
Furthermore, we like that BNS owns Tangerine Bank, which is its fully online subsidiary. Opening accounts and applying for financial products is very quick and easy. Tangerine seems well-positioned to capture the younger demographics who prefer to do almost everything online. Since Tangerine is owned by BNS, Tangerine clients can use BNS ATMs to withdraw or deposit cash.
Lastly, Scotiabank has billed itself as “Canada’s most international bank” due to its acquisitions primarily in Latin America and the Caribbean, and also in Europe and parts of Asia.
This international expansion may open the bank up to more potential risks. However, it also increases the possibility of higher growth.
Wall Street’s Take
Turning to Wall Street, The Bank of Nova Scotia has a Moderate Buy consensus rating, based on five Buys and four Holds assigned in the last three months. The average Bank of Nova Scotia price target of $69.09 implies 11.5% upside potential.
Final Thoughts
Scotiabank is a safe and reliable investment that seems positioned to benefit from rising rates, an increasing shift to online banking, and international growth.
Disclosure: At the time of publication, Stock Bros Research did not have a position in any of the securities mentioned in this article.
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