The Bank of Nova Scotia reported adjusted net income of $ 1.3 billion for the three months ended July 31. This is a decrease of 47% compared to the same period last year.
It sounds bad, but the success might not be as ugly as it looks.
The Bank of Nova Scotia recorded $ 752 million in provisions for credit losses (PCL) in Canadian banking operations and an additional $ 1.3 billion in PCL for international operations during the quarter. This is the money that the bank sets aside to cover possible defaults.
The number of PCLs has increased dramatically due to the impact of the pandemic. Terminal losses might not be as high if the economy rebounds better than expected.
When the PCL is canceled, the bank’s adjusted profit slipped 3% for the quarter compared to Q3 2019. Canadian bank profit fell 10% before PCL and international bank profit fell 21%.
Risks to Bank of Nova Scotia Shares
The PCL cannot be ignored. Indeed, the size of the load in international operations increased by 27% compared to Q2 2020. This indicates the uncertainty around the time frame for economic recovery in the international group.
The Bank of Nova Scotia has invested billions of dollars in recent years to acquire banks and credit card wallets in Mexico, Peru, Chile and Colombia. These are the four core members of the Pacific Alliance trade bloc that enable the free flow of goods, capital and labor.
Latin America continues to fight the increase in COVID-19 cases. Until vaccines are widely available, further lockdowns may be needed. This would delay the recovery in the region.
In Canada, the economy appears to be rebounding as expected. Unemployment rates have fallen in recent months and government assistance measures have helped millions of homeowners get through the worst time of the crisis.
That said, mortgage deferrals will begin to expire, potentially leading to a wave of personal and business bankruptcies. If the economic recovery slows, defaults could skyrocket and the housing market could suffer significantly. In this scenario, the Bank of Nova Scotia and its peers would suffer.
Beyond the pandemic, the Pacific Alliance countries offer attractive growth potential for the Bank of Nova Scotia and its investors. The economic zone has more than 225 million people. Banking penetration is below 50% and a growing middle class is expected to drive demand for loans, credit cards and investment products to grow.
At home, the Canadian housing market remains strong, despite the sharp rise in unemployment. Great rates and a constant flow of buyers seem to help. The market as a whole may not support the 9-18% price collapse predicted by CMHC over the next 12-18 months.
COVID vaccines are expected in the first half of 2021. Their arrival and distribution could give the economy a big boost. This would translate into better job gains and reduce the threat of defaults.
Should You Buy Bank of Nova Scotia Stock Today?
Short-term volatility should be expected, but the Bank of Nova Scotia’s stock price likely reflects the continuing challenges. The shares are trading near $ 55.50 at the time of writing. This is less than 10 times the expected benefits. The other major Canadian banks are currently posting multiples of 11.5 to 12.5.
Bank of Nova Scotia shares were above $ 74 before the pandemic, so there is great upside potential.
If you have cash available in a TFSA or an RRSP, it may be time to add BNS stocks to the portfolio. You get a strong dividend yield of 6.5% and you should see the share price significantly higher over the next five years.
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The Motley Fool recommends BANK OF NOVA SCOTIA. Silly contributor Andrew Walker has no position in any of the stocks mentioned.