Is Bank of Nova Scotia (BNS) a Buy After a Record-Breaking Q3 Earnings Beat and Strategic Execution?

Bank of Nova Scotia (BNS) has delivered one of its most impressive quarterly performances in recent memory, with Q3 2025 earnings that not only exceeded expectations but also signaled a shift toward disciplined capital allocation and long-term value creation. The bank's ability to outperform on revenue ($9.49 billion vs. $9.3 billion expected) and EPS ($1.88 vs. $1.73 expected) by double-digit margins has sparked renewed investor interest. But beyond the headline numbers lies a deeper story of strategic execution, operating leverage, and a resilient Canadian banking sector poised to capitalize on global opportunities.

Strategic Capital Allocation: A Foundation for Sustainable Growth

Scotiabank's Q3 results highlight its commitment to optimizing capital deployment. The bank ended the quarter with a CET1 ratio of 13.3%, a robust buffer that allows for continued share repurchases and dividends without compromising regulatory requirements. Under its current NCIB, the bank repurchased 3.2 million shares, signaling confidence in its intrinsic value. This disciplined approach to capital returns—coupled with a focus on high-return investments in international markets—positions BNS to outperform peers in a sector where capital efficiency is paramount.

The bank's strategic investments in the U.S. and emerging markets are particularly noteworthy. For instance, Global Banking and Markets (GBM) saw a 29% year-over-year earnings surge, driven by advisory fees and trading revenues. The U.S. now accounts for 42% of GBM earnings, a testament to the bank's ability to tap into high-growth corridors while maintaining cost discipline. Investors should monitor how effectively these investments translate into long-term ROE improvements, especially as the bank aims to sustain its 12.4% ROE (up 110 bps year-over-year).

Operating Leverage: Fueling Earnings Momentum

Scotiabank's operating leverage—defined as the ability to grow earnings faster than revenue—is a key driver of its outperformance. The bank achieved a 12% year-over-year revenue increase and a 13% rise in net interest income, while non-interest income grew 10%. This diversification of revenue streams, particularly in Global Wealth Management (up 13% YoY) and International Banking (up 7% YoY), reduces reliance on volatile markets and enhances resilience.

The Canadian Banking segment, though a smaller portion of the business, demonstrated strong quarter-over-quarter growth (7% earnings increase) and a 2% rise in average loans. This suggests that the bank is successfully balancing domestic stability with international expansion. The 15% ROE in International Banking, up 180 bps YoY, further underscores the power of operating leverage when combined with strategic market positioning.

Long-Term ROE Improvement: A Test of Strategy and Discipline

Sustaining ROE growth in a low-growth environment is no small feat, but Scotiabank's Q3 results suggest it is on the right path. The bank's focus on technology—such as AI tools for frontline employees and a chatbot handling 125,000 monthly inquiries—reduces costs while improving client engagement. These innovations are critical for maintaining ROE in a sector where margins are under pressure from rising interest rates and inflation.

However, challenges remain. The bank's caution about economic headwinds in Canada and emerging markets is warranted. While its CET1 ratio provides flexibility, investors must assess whether the bank's risk appetite aligns with its long-term ROE goals. The 5-7% growth target for International Banking in 2025 is ambitious but achievable if the bank continues to prioritize high-ROE initiatives like global transaction banking and debt capital markets.

Investment Implications: A Buy for the Long-Term

Scotiabank's Q3 performance is more than a one-off beat—it reflects a coherent strategy of capital discipline, operating leverage, and ROE-focused growth. The stock's 5.01% post-earnings rally suggests the market is beginning to price in these strengths. Historically, BNS has averaged a 2.5% gain following earnings beats, as shown by backtests from 2022 to 2025, reinforcing the idea that strong results consistently drive positive investor sentiment.

Buy case:
- Strong capital returns (CET1 at 13.3%) and a 3.2 million share repurchase in Q3.
- Diversified revenue streams (net interest income + non-interest income growth).
- Strategic investments in high-growth markets (U.S., emerging economies).
- AI-driven efficiency gains and client primacy initiatives.

Risks to consider:
- Economic slowdowns in Canada or emerging markets could pressure loan growth.
- Rising interest rates may compress net interest margins if not offset by pricing power.
- Regulatory changes in international markets could disrupt expansion plans.

Final Verdict

Bank of Nova Scotia's Q3 results are a masterclass in strategic execution. The bank's ability to balance capital returns with long-term ROE growth, while navigating a complex economic landscape, makes it a compelling buy for investors with a 3-5 year horizon. However, success hinges on the bank's ability to maintain its disciplined approach to capital allocation and continue leveraging operating leverage in its international segments. For those willing to ride the wave of a resilient Canadian banking sector, BNS offers a rare combination of near-term momentum and long-term potential.