Scotiabank's Strategic Turnaround and Earnings Recovery: Is Now the Time to Buy?

The Bank of Nova Scotia (Scotiabank) has emerged as a compelling case study in strategic resilience within the Canadian banking sector. After years of navigating trade uncertainties and macroeconomic headwinds, the bank's recent performance has sparked renewed investor interest. Royal Bank of Canada (RBC)'s recent price target upgrade—from CAD 80 to CAD 86—reflects a broader institutional consensus that Scotiabank is on a path to outperform its peers. But is this optimism justified? A closer look at its improving credit metrics, disciplined cost management, and valuation discount offers a compelling case for near-term outperformance.

Catalysts Behind the Price Target Upgrade

RBC Capital's upgrade was driven by three key factors: sequential earnings improvement, reduced credit loss provisions, and strategic partnerships. Scotiabank's Q3 2025 results, released on August 26, 2025, demonstrated a 13.4% year-over-year revenue increase and a CET1 capital ratio of 13.3%, signaling robust capital resilience. Analysts highlighted a 5.3% surge in share price following the earnings beat, which outperformed the sector average.

The most striking catalyst was the decline in credit loss provisions. For Q3, Scotiabank reported CAD 1.04 billion in provisions, down from CAD 1.4 billion in Q2 and CAD 1.05 billion in Q3 2024. This reduction, coupled with a 5-basis-point expansion in net interest margin to 2.36%, underscores the bank's ability to manage risk while maintaining profitability. RBC analysts also cited the bank's partnership with TXNM Energy as a strategic differentiator, opening new revenue streams in the energy sector.

Credit Metrics: A Sector Leader in Risk Management

Scotiabank's credit quality improvements are critical to its turnaround narrative. As of Q3 2025, its non-performing loan (NPL) ratio remained below 1%, aligning with the sector average but outperforming peers like TD Bank, which reported a 1.2% NPL ratio. The bank's proactive exit from high-risk Latin American markets and refocus on North American operations have reduced exposure to volatile regions.

Moreover, Scotiabank's efficiency ratio improved to 53.7% in Q3 2025 from 56.0% in Q3 2024, reflecting disciplined cost management. This is a stark contrast to BMO, which, despite strong U.S. commercial lending growth, still maintains an efficiency ratio of 55.2%. The Bank of Canada's stress test results further validate this resilience: even under a severe recession scenario, Scotiabank's CET1 ratio of 13.3% would remain well above the regulatory minimum of 11.5%.

Cost Discipline and Operational Leverage

Scotiabank's cost discipline has been a cornerstone of its recovery. In Q2 2025, the bank achieved 2% positive operating leverage, driven by cost reductions in its Canadian Banking and Wealth Management divisions. This translated to an adjusted EPS of CAD 1.88, surpassing the consensus estimate of CAD 1.73. The bank's share repurchase program—3.2 million shares under a 20 million NCIB—has further boosted shareholder returns, leveraging excess capital to enhance per-share value.

Comparatively, BMO's operating leverage gain of 5.7% in Q2 2025 was impressive but came with higher risk exposure in its U.S. commercial loan book. Scotiabank's balanced approach—prioritizing capital efficiency over aggressive growth—positions it as a safer bet in a sector where overextension can quickly erode margins.

Valuation Discount: A Hidden Opportunity

Despite these strengths, Scotiabank trades at a valuation discount relative to peers. As of Q3 2025, its P/E ratio stands at 14.21, compared to BMO's 15.8 and RBC's 15.3. This discount is partly due to its international exposure, which has historically made it more sensitive to trade tensions. However, the Canadian federal government's push to eliminate interprovincial trade barriers—a policy expected to unlock CAD 150 billion in economic growth over the next decade—could narrow this gap.

Investment Thesis: Timing the Turnaround

The case for investing in Scotiabank hinges on three pillars:
1. Earnings Momentum: With Q3 results already exceeding expectations and Q4 poised to benefit from a more normalized interest rate environment, the bank is well-positioned to sustain its earnings trajectory.
2. Credit Resilience: Its low NPL ratio and controlled provisions suggest a conservative approach to risk, which is critical in a sector where overleveraging can lead to sudden downturns.
3. Valuation Attractiveness: A P/E ratio below peers and a CET1 ratio of 13.3% offer a margin of safety, making it an appealing entry point for long-term investors.

However, risks remain. Trade tensions and mortgage renewal pressures could reignite credit losses, particularly in its international retail portfolio. Investors should monitor Q3 2025 results closely, as they will provide clarity on whether the bank can maintain its momentum.

Conclusion

Scotiabank's strategic turnaround is not a flash in the pan but a calculated response to macroeconomic challenges. RBC's upgraded price target, coupled with its improving credit metrics and disciplined cost structure, makes a compelling case for near-term outperformance. While the valuation discount reflects lingering caution, it also presents an opportunity for investors willing to bet on the bank's ability to navigate uncertainty and capitalize on its North American focus. For those seeking a balanced mix of growth and stability in the Canadian banking sector, Scotiabank's current valuation and strategic positioning warrant serious consideration.