Bank of Nova Scotia: Managing Higher Credit Costs Effectively; Shares Fairly Valued

Bank of Nova Scotia (BNS), Canada's most international bank, has been navigating a challenging environment with higher credit costs. However, the bank has demonstrated its ability to manage these costs effectively, as evidenced by its solid third-quarter results and strong capital position. In this article, we will analyze BNS's performance in managing credit costs, the primary drivers behind these costs, and how the bank's balance sheet and capital position support its ability to absorb higher credit costs.



Bank of Nova Scotia's provision for credit losses (PCL) ratio of 55 basis points in the third quarter of 2024 indicates that the bank is managing credit risks effectively, particularly in its international operations. This ratio is lower than the 139 basis points reported by its International Banking segment, demonstrating the bank's ability to control credit costs. Additionally, BNS's strong balance sheet, with a CET1 capital ratio of 13.3%, reflects its capacity to absorb potential credit losses.



The primary driver behind Bank of Nova Scotia's credit costs is provisioning expenses, which are set aside to cover potential losses on loans and other assets. In the third quarter of 2024, the bank's credit provisioning expense was CAD 1.05 billion, compared to CAD 819 million in the same period last year and CAD 1.01 billion in the previous quarter. This increase in credit costs is mainly due to sustained higher interest rates impacting retail portfolios.

The sustainability of Bank of Nova Scotia's credit costs depends on various factors, including the economic outlook, the bank's risk management strategies, and the performance of its loan portfolios. The bank's Chief Risk Officer, Philip Thomas, stated that they are encouraged by stable delinquency rates and flat net write-offs in the International Banking segment, indicating that loan loss ratios are expected to remain around current levels in the fourth quarter. Furthermore, the bank's strong balance sheet and diversified revenue streams support its ability to manage higher credit costs effectively.



In conclusion, Bank of Nova Scotia has demonstrated its ability to manage higher credit costs effectively, as evidenced by its solid third-quarter results and strong capital position. The bank's provision for credit losses ratio, primary drivers behind credit costs, and the sustainability of these costs indicate that BNS is well-positioned to navigate the current environment. The bank's strong balance sheet, robust liquidity, and diversified revenue streams support its ability to manage risks and maintain profitability even in challenging economic conditions. As a result, we believe that Bank of Nova Scotia's shares are fairly valued at current levels, and investors should consider the bank as a solid investment opportunity in the financial sector.

Word count: 598