Why Scotiabank's 30% Rally Isn't Done Yet

Scotiabank (TSX:BNS) has surged by 30% in 2025, driven by robust earnings, digital transformation, and international expansion. Yet, despite this rally, the stock remains significantly undervalued relative to its intrinsic worth, supported by rigorous valuation models and a compelling growth narrative. This article argues that the rally is far from over, as the market underappreciates the bank's long-term catalysts and its ability to outperform peers in a rapidly evolving banking sector.

Undervaluation: The Excess Returns Model and DCF Analysis

The Excess Returns model, a cornerstone of value investing, estimates Scotiabank's intrinsic value at CA$118.48 per share, implying a 22% discount to its current price according to analysis. This model incorporates key metrics such as book value per share (CA$67.45), earnings per share (CA$8.60), and a projected return on equity of 13.02%. These figures suggest the bank is generating value well above its cost of equity, a critical signal for long-term investors.

Further support comes from discounted cash flow (DCF) models. One analysis pegs the fair value at CA$154.73 per share, a 57% premium to the current price, while another estimates CA$124.05, a 26% discount. The divergence in DCF estimates reflects varying assumptions about growth rates and risk premiums, but both underscore a common theme: the market is not fully pricing in Scotiabank's future cash flow potential.

Growth Catalysts: Digital Banking and International Expansion

Scotiabank's strategic investments in digital banking and international markets are unlocking new value. The bank has prioritized AI-driven platforms and global transaction banking, enhancing client connectivity and operational efficiency. For instance, its International Banking segment reported adjusted earnings of $2.8 billion in 2025, a 2% year-over-year increase. This growth is not just a short-term win-it reflects a structural shift toward high-margin international services, which now account for a significant portion of the bank's revenue.

Domestically, digital transformation is reshaping customer engagement. AI-powered hyper-personalization is improving retention and cross-selling, while automation reduces costs. In Q4 2025, Scotiabank exceeded expectations with EPS of CA$1.93 and revenue of CA$9.77 billion, driven by strong performance in capital markets and wealth management. These results validate the bank's ability to execute its digital strategy while maintaining profitability.

Sector Momentum: AI, M&A, and Geopolitical Shifts

The broader banking sector is undergoing a transformation fueled by AI, M&A activity, and geopolitical realignment. Corporate and investment banking revenue grew by 4% in 2024, with a 5% year-over-year increase in the first half of 2025. AI is not just a buzzword-it's redefining core workflows, from credit underwriting to fraud detection. Scotiabank's early adoption of AI positions it to capture market share in this high-growth area.

Meanwhile, global M&A activity hit $4.3 trillion in 2025, with banks prioritizing long-term value creation over short-term expansion. Scotiabank's international footprint and digital infrastructure make it a prime beneficiary of this trend, particularly in emerging markets where it has a competitive edge. Geopolitical fragmentation is also driving demand for localized financial solutions, a space where Scotiabank's global network excels.

Peer Valuations and Cautious Narratives

While Scotiabank trades at a 17.8x P/E ratio, higher than the Canadian banking industry average, its intrinsic value estimates suggest this premium is justified. Peers like CIBC are also undervalued-CIBC's Excess Returns model intrinsic value is CA$176.61 per share, with a 31.6% discount according to analysis. However, Scotiabank's combination of stable earnings, strong capital cushions, and aggressive growth strategies gives it an edge.

Analysts remain cautious. Jefferies' John Aiken notes the sector is "fully valued" with P/E ratios around 13.0x, warning of potential volatility until mid-2026. Yet, Mike Rizvanovic of Scotiabank counters that valuation multiples are more attractive when projected against future earnings, suggesting upside post-earnings season. The Bank of Canada's 2025 Financial Stability Report also highlights the sector's resilience, citing elevated capital buffers and liquidity levels.

Conclusion: A Re-Rating Is Imminent

Scotiabank's 30% rally is a prelude to a larger re-rating. The bank's undervaluation, as highlighted by the Excess Returns and DCF models, is a clear signal for investors. Its digital and international strategies align with sector-wide trends, while its strong capital position insulates it from macroeconomic risks. As the market begins to appreciate these fundamentals, the stock is poised to close the gap between its current price and intrinsic value.

For long-term investors, the question is not whether Scotiabank can continue its rally-but how soon the market will catch up.