Scotiabank's Strategic Capital Allocation and Undervaluation Present a Compelling Buy Opportunity

The Bank of Nova Scotia (BNS.TO) stands at a critical juncture, leveraging robust capital metrics, disciplined capital allocation, and growth catalysts to position itself for a valuation re-rating. With a CET1 ratio of 13.2%, a $20 million share buyback, and a 10.7% upside to its $76.73 price target, investors are presented with a rare blend of defensive traits and asymmetric upside. Let's dissect how Scotiabank's strategic initiatives and undervalued multiple create a compelling case for a BUY.

The Power of Capital Fortification

Scotiabank's Common Equity Tier 1 (CET1) ratio of 13.2% as of Q2 2025 exceeds regulatory requirements and outpaces most Canadian peers, such as Toronto-Dominion Bank (TD.TO) at 12.3%. This buffer not only insulates the bank from macroeconomic shocks but also fuels its ability to deploy capital strategically. The recent $20 million Normal Course Issuer Bid (NCIB) signals confidence in the stock's undervaluation. With a P/E ratio of 13.52 versus TD's 15.2, BNS trades at a discount despite its stronger capital position and growth trajectory.

Growth Catalysts: U.S. Expansion and KeyCorp Synergies

Scotiabank's 14.9% stake in KeyCorp (KEY), a U.S. regional bank, has already contributed $0.05 to EPS in Q2 2025. This partnership taps into the U.S. market's 0.6% GDP growth (projected for 2025), offering diversification beyond Canada's slower 1.6% GDP growth. The integration of KeyCorp's operations into Scotiabank's Global Wealth Management (GWM) division could unlock cross-selling opportunities, particularly in capital markets, where GWM revenue surged 28% YoY in Q2.

Additionally, the bank's Mortgage+ solution, which accounted for 88% of new mortgages, underscores its ability to innovate in core lending segments. These initiatives are underpinned by a low beta of 0.8, meaning the stock is less volatile than the broader market—a critical defensive trait in uncertain times.

Valuation Arbitrage: The Case for Upside

Scotiabank's P/E ratio of 13.5 lags behind its Canadian peers, including Royal Bank of Canada (15.06) and Toronto-Dominion (15.2), despite superior capital metrics and growth catalysts. Analysts project a $76.73 price target, implying a 10.7% upside from current levels. This gap suggests the market has yet to fully price in the value of its U.S. expansion, robust capital position, and buyback program.

Navigating Risks with Defensive Resilience

While risks such as rising credit provisions (ACL ratio at 95 bps) and potential headwinds in Latin American markets (e.g., Mexico's contraction) warrant caution, Scotiabank's dividend resilience and liquidity buffers mitigate these concerns. The bank has maintained a $1.10 quarterly dividend, up $0.04 YoY, with a payout ratio of 47%—comfortably sustainable given its capital strength.

Moreover, its Liquidity Coverage Ratio (131%) and Net Stable Funding Ratio (120%) ensure it can weather economic volatility. The International Banking division, which reported a Q2 net loss, is already showing sequential improvement, narrowing its loss by $97 million QoQ due to lower interest rates and KeyCorp contributions.

Investment Thesis: Buy Now, Reap Later

The confluence of fortified capital, strategic buybacks, and underappreciated growth drivers positions BNS.TO for a valuation rebound. With a 10.7% upside to its $76.73 target and a yield of 3.8%, the stock offers both capital appreciation and income.

Actionable Recommendation:
- BUY BNS.TO at current levels, targeting $76.73 with a 12-month horizon. - Risk Management: Set a stop-loss at $62.50 (20% below current price) to protect against a prolonged credit deterioration or Latin American divestment setbacks.

Conclusion

Scotiabank's disciplined capital allocation, undervalued multiple, and growth catalysts in U.S. markets and wealth management present a compelling BUY opportunity. While risks exist, the bank's defensive traits and dividend resilience offer a margin of safety. Investors ignoring this valuation gap may miss out as Scotiabank's strategic moves finally translate into market recognition. Act now before the revaluation begins.