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The Bank of Nova Scotia building is shown in the financial district in Toronto on Tuesday, August 22, 2017. THE CANADIAN PRESS/Nathan DenetteNathan Denette/The Canadian Press

Among Canada’s Big Six banks, Bank of Nova Scotia’s subpar share price performance stands out. The good news: The stock’s low valuation and high dividend yield are also distinctive, offering compelling reasons to give this laggard a second look.

Though the stock has rebounded from lows last year and has risen above levels seen before the COVID-19 pandemic arrived in North America, Scotiabank’s returns are at the back of the pack.

The country’s third-largest lender trailed its peers in 2020, slumping 6.2 per cent (not including dividends). That’s considerably worse than the 1.6-per-cent average decline for the group, when investors were concerned about the economic damage caused by the pandemic.

So far in 2021, Scotiabank’s share price is up 15 per cent, helped by the rebounding Canadian economy and the strong housing market, which can underpin confidence in lenders.

But there’s a reason you might not be hearing many cheers: Big bank stocks have risen by an average of 26.5 per cent year to date, which is 11.5 percentage points better than Scotiabank.

Blame the underperformance on the bank’s long-standing exposure to international markets. Its substantial presence in the Pacific Alliance countries of Mexico, Chile, Peru and Colombia, as well as the Caribbean, can work well during good times because of the relatively strong long-term economic growth in those regions.

But the pandemic is still weighing down those economies. In Mexico, for example, supply-chain disruptions and parts shortages are slowing the pace of a recovery. The Delta variant is also crimping international travel and tourism, traditionally a large source of revenue for the country.

The impact on Scotiabank’s financial results for the fiscal third quarter ended July 31, released this week with results from other banks, highlighted the challenges to its international banking division.

Revenues from Canadian banking increased by a healthy 6.5 per cent from the previous quarter, but revenues from international banking declined slightly, due to disappointing loan growth and the impact of low interest rates on loan margins.

Scotiabank’s adjusted Canadian profit (before taxes and provisions for bad loans) is now 4 per cent above levels seen in the first quarter of 2020, before the pandemic slammed into the global economy. In the international division, though, this profit is languishing a remarkable 19 per cent below early 2020 levels.

“While we saw heady results from the domestic segment, the international one continues to operate at a level far below its pre-COVID pace,” Gabriel Dechaine, an analyst at National Bank of Canada, said in a note.

But for investors, there may be an attractive opportunity here. Several analysts say it is only a matter of time before Scotiabank’s international operations hit their stride again, as regional economies gain strength and loan growth picks up.

Central banks in Chile and Mexico raised their key interest rates earlier this summer, which should boost profits on bank loans. Scotiabank’s managers expect retail loan growth will accelerate in the fourth quarter.

The nice part about betting on the stock now is that it is trading at relatively cheap levels. Scotiabank has the lowest price-to-book ratio among the Big Six, at 1.5. The sector average is 1.64, according to RBC Dominion Securities.

The stock’s forward price-to-earnings ratio, based on profit estimates for 2022 from RBC Dominion analyst Darko Mihelic, is also low, at 9.4. The P/E ratio for Canadian Imperial Bank of Commerce – often the bank stock with the lowest valuation – is 9.9. At the pricier end, Toronto-Dominion Bank’s P/E is 10.6.

Scotiabank’s dividend yield is also more attractive than all its peers. The yield is 4.5 per cent at Friday’s closing share price, compared with CIBC’s 3.9 per cent and TD’s 3.7 per cent (and, for that matter, the paltry 0.84-per-cent yield on the five-year Government of Canada bond).

Scotiabank’s higher yield may reflect the prospect of slower dividend increases than other banks, once the banking regulator gives the sector the go-ahead to raise them again (increases have been curtailed during the pandemic). But that’s no reason to shun the stock.

Buying an underperforming Big Bank stock is a compelling strategy for driving outsized returns, because Canadian banks have an uncanny ability to correct struggling elements. For Scotiabank’s international banking division, a bit of patience may be all that’s needed.

Full disclosure: The author owns units in the BMO Equal Weight Banks Index ETF.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:29pm EDT.

SymbolName% changeLast
BNS-T
Bank of Nova Scotia
+0.94%70.07

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