Scotiabank: Further Upside Is Capped By Valuation

2026-02-21 04:58:24 ET

Thesis

I rate Scotiabank ( BNS ) as a Hold, mainly due to valuation. The Price/book has actually turned out to be a very sound metric to value this company, since it oscillated between 0.9-1.9x historically. My base case for fair value is the historical median at 1.4x. This is primarily because that's where the market traded in the last 10 years. The USD P/B ratio is currently at 1.52x, but as I discuss in the valuation section, I expect it to compress to 1.47x. Regarding ROE, while there are different ways to calculate it (GAAP vs. Non-GAAP, quarterly vs yearly, total equity-based vs common equity-based), they range between 8-12.5%. After all, this is the annual return for the shareholder, and it justifies, to some extent, the mild overvaluation. Plus, I believe it will increase a bit (say 100 bps) due to cost reductions plus accretive divestitures, but this might not be enough to justify a buy rating given the current valuation....

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