Once a perennial underperformer, Scotiabank stock is making a comeback
If you need a clear indication of how well Canadian bank stocks are performing this year, consider this nugget: Even Bank of Nova Scotia is shooting the lights out.
Sean Kilpatrick/The Canadian Press
The perennial underperformer among the Big Six lenders has been leading the pack over the past three months, with a gain of more than 15 per cent, as of Thursday.
That’s 10 percentage points better than the average return for the other five banks over the same period, and about 8 percentage points better than the S&P/TSX Composite Index.
Given the upbeat outlook in this week’s quarterly earnings report and the stock’s far more reasonable valuation in a fully valued sector, Scotiabank should be able to maintain the momentum.
The stock’s comeback won’t come as a surprise to investors who embrace the buy-the-laggard strategy, the popular approach to stock-picking that is based on buying the worst-performing Canadian big bank stock in the hope of a rebound.
Last year, Toronto-Dominion Bank – all battered and bruised after U.S. regulators imposed severe penalties on it in 2024 for the bank’s flawed anti-money laundering efforts – delivered the goods for anyone betting on a return-to-form.
TD’s share price surged 67 per cent in 2025, easily beating all its peers. It has gained another 28 per cent so far this year.
Though Scotiabank’s peer-leading performance is over a shorter period, it may be just getting started.
For one thing, there’s a lot of catching up to do. The stock remains well behind its peers over the longer term. Its returns over the past five years put it dead-last among the Big Six, as investors fretted over the bank’s less profitable operations in emerging markets, among other things.
For another, the banking sector’s high valuations have been raising eyebrows among analysts. Yet, Scotiabank stands out from the pack with a couple of measures that point to a stock that is cheaper, if not exactly cheap.
It trades at 15.3-times analysts’ estimated earnings, according to Bloomberg data. That’s the lowest price-to-earnings ratio among the Big Six and well below Royal Bank of Canada’s premium 17.8 P/E ratio.
The dividend also shines a little brighter. The yield is 3.5 per cent, the highest among the Big Six and the only bank that currently has a yield above 3 per cent.
To be clear, there are no bargains here. But Scotiabank is less pricey than its peers, which should attract more attention among investors if the bank can demonstrate consistently strong performance.
There’s a good chance it will.
The bank’s fiscal third-quarter financial results, released this week, suggest that the strategic priorities of CEO Scott Thomson – which include focusing on operations in Canada, the United States and Mexico; deepening its offerings in wealth management and insurance; and improving digital platforms – are paying off.
A standout figure: The bank’s return on equity (ROE), which is a measure of profitability, rose to 14.2 per cent, up from 12.4 per cent a year ago.
That’s a big move for a bank. It is also a big deal because Scotiabank had targeted a 14 per cent ROE for fiscal 2027 – which means it is ahead of schedule as it improves efficiency, develops deeper client relationships that are built on more than, say, a chequing account or mortgage, and directs capital to its more profitable North American operations.
“We expect to continue to improve return on equity and close the gap with peers through a steady improvement in our business mix, fee income growth and ongoing productivity gains,” Mr. Thomson said during a conference call with analysts.
Even Scotiabank’s far-flung operations in Colombia, Peru and Chile may be catching a tailwind now.
Emerging markets had been out of favour with investors for years as economic activity failed to live up to expectations.
Now, they’re gaining favour: The iShares MSCI Emerging Markets ETF, an exchange-traded fund, has rallied about 35 per cent over the past year as earnings growth picks up and the U.S. dollar wavers – arguably bolstering the appeal of Scotiabank’s international footprint even as it focuses on North America.
The key problem here for the stock, though, is that it could fall off the radar screens of investors who are on the lookout for laggards among the banks, as other underperformers take its place.
But here’s a thought: Perhaps Scotiabank can shed its status as a laggard in the banking sector and emerge as a momentum play. With a relatively attractive valuation, a bigger-than-average dividend yield and improving profitability, don’t rule it out.
Sign up for our new Business Brief newsletter.
A daily look at the most important business stories that are making news and moving markets, written by Chris Wilson-Smith
Sign up Explore newsletters
