Scotiabank Share: High Yield at Attractive Price (NYSE: BNS)

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Financial stocks are supposed to be a profitable segment this year due to higher interest rates. However, uncertainty about the health of the economy has driven the valuations of many large banking stocks back.

This brings me to the Canadian banking giant, Bank of Nova Scotia (NYSE: BNS), otherwise known as Scotiabank. As shown below, Scotiabank followed a somewhat steady downward trajectory last month, falling by 8% in this time frame.

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BNS Share (Alpha Search)

This article highlights why this creates an attractive entry point for the BNS, so let’s get started.

BNS: This high performance product is getting interesting

Scotiabank was founded in the 19th century and is one of the oldest banks in the world. It is also one of the five largest banks in Canada and has a market capitalization of $ 81 billion. The bank has more than 25 million customers, $ 1.2 trillion in assets and a strong presence in both North America and key emerging markets.

In particular, the BNS has paid an uninterrupted dividend since 1940, during which it was cut at the request of the Canadian government during World War II. Scotiabank currently offers a yield of almost 5%. This is much higher than the average dividend yield for the S&P 500, which is currently just 1.3%. It is also well protected by a relatively low 45% payout ratio and rose 11% in November from $ 0.90 to $ 1.00.

Meanwhile, recent volatility has pushed Scotiabank’s share price down sharply. As shown below, the stock price is now below the mobile average of $ 71.43 for 200 days and has an RSI rating of 32, indicating that it is approaching the oversold area.

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BNS Stock Technicals (StockCharts)

The BNS is also performing well, with adjusted net income growing 14% year-on-year to $ 2.15 per share in the first quarter of 2022 (ended January 31). Scotiabank also remains well-capitalized, with a Common Equity Tier 1 capital ratio of 12.0%, above the minimum requirement of 8%. The strong end results came from strong loan growth, increased customer activity, favorable credit quality and cost-effectiveness.

The international banking sector also saw double-digit profit growth, due to strong growth in mortgages and commercial loans. In addition, BNS is seeing strong growth in the Wealth Management unit, with AUM growing 11% year-on-year in the last quarter. Also encouragingly, Scotiabank was recently named Bank of the Year in Canada by The Banker magazine, and this reflects positively on the management team.

Looking to the future, the recent change in interest rates by the US Federal Reserve may prove to be the opposite wind for the economy, especially if it is very aggressive in raising interest rates. This could negatively affect US banks as well as their Canadian counterparts.

While this is a potential downside for BNS, I see reason to be optimistic about what the bank is doing about things that are under its control. First, BNS sees strong momentum in the Canadian Wealth unit and recently launched a partnership with SigFig, a business finance technology company, to support a digital consulting platform.

Digital adoption has also improved, with active mobile users increasing by 13% and the self-service transaction rate increasing to 91%, resulting in the bank’s operational efficiency. The management also highlighted the future prospects for its tech investment bank Roynat, as noted during last month’s financial services conference:

We have invested heavily in all the technology hubs you see in the top 10 Tier 1 cities. In Canada, Roynat is a very active brand in this regard. It’s an excellent remuneration business combined with this as well as transportation. I hope that the permanent shift towards climate change is now much more appreciated, I think it will create a whole range of technologies related to transport. And we will be big participants there, just like last year.

I see the value in the BNS at the current price of $ 67.51 with a PE 10.1 promoter, below the long term normal PE of 12.1. Analysts on the sell side have a consensual buy rating with an average target price of $ 73.69. This translates into a potential annual return of 14% including dividends.

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BNS Valuation (QUICK GRAPHS)

Takeaway for investors

Scotiabank remains a strong and well-capitalized bank, with a diversified business mix and good growth prospects. It sees strong operating sizes and is making significant progress towards digital banking, which is improving its operating leverage. Although no one can say where the stock may fall, the recent weakness in the stock price provides an attractive entry point for long-term investors.

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