One portfolio manager says Bank of Nova Scotia’s fourth quarter earnings miss indicated that the lender’s underlying fundamentals didn’t justify its share price, which had been on an upward trajectory for several months.
“It’s had a great run, and this is what happens to stocks that generally speaking have a great run,” Mike Vinokur of MV Wealth Partners with iA Private Wealth told BNN Bloomberg in a Tuesday interview.
“It’s a well-run franchise, it’s a well-run bank, but at a certain point in time you have to look at the fundamentals and the fundamentals need to catch up to the valuation.”
On Tuesday, Scotiabank reported earnings that missed estimates on higher-than-expected expenses and tax charges, as well as a $379 million one-time impairment charge related to its investment in Bank of Xi’an Co. in China.
The Toronto-based lender said it earned $1.57 per share on an adjusted basis in its fourth quarter, less than the $1.60 average estimate of analysts in a Bloomberg survey. Scotiabank shares were down more than three per cent in afternoon trading on Tuesday.
Vinokur said that while he has been impressed with the job that Scotiabank has done under the leadership of CEO Scott Thomson who took the helm in early 2023, there are ongoing macroeconomic challenges that the bank, along with its peers, is struggling to overcome.
“Banking’s a tough business. You look at the gross domestic product (GDP) in Canada, it’s trailing the U.S., so maybe that’s sort of influencing it,” he said.
“And we just don’t think that banking’s going to be a robust business especially in Canada over the next two to four quarters simply because we think that provisions for credit losses are going to be elevated.”
Those provisions, which are put aside by lenders to cover the cost of potentially bad loans, have been a pain point for each of Canada’s largest banks for several quarters as Canadian consumers and businesses have struggled with high costs and inflation.
Vinokur said that he’s still bullish on Scotiabank over the longer term but warned that investors may want to be cautious about their exposure to the stock during the current credit cycle, which “has taken a little bit longer to come to fruition than we would have thought.”
He added that going forward, he’ll be looking to see how Scotiabank’s recent acquisition of roughly 15 per cent of U.S. regional lender KeyCorp will contribute to the bank’s profitability.
“I’m interested to see how that plays out and if that eventually buys them that toehold in the U.S. market that Scotia never really had compared to its other brethren in Canada,” Vinokur said.
With files from Bloomberg News