Bank of Nova Scotia is the cheapest bank stock, this analyst says

RBC Dominion Securities analyst Darko Mihelic said Bank of Nova Scotia’s (Bank of Nova Scotia Stock Quote, Chart, News, Analysts, Financials TSXV:BNS) fiscal fourth-quarter results beat expectations, but he “continues to struggle” with the stock’s investment case, arguing that its return profile justifies a valuation below the peer-group average.

As reported by the Globe and Mail, Mihelic maintained a “Sector Perform” rating and lifted his 12-month target to $97.00 from $86.00. The Street average is $98.34.

He said Scotia continues to trade at the lowest valuation in the Canadian bank group, with a 1.59× price-to-book multiple that is consistent with its historical range. However, he sees that discount as warranted given “lower returns with higher risk premia,” citing weak core ROE relative to peers — 13.0% in 2026 (versus 13.5%) and 14.0% in 2027 (versus 14.3%).

Scotia reported adjusted EPS of $1.93 for Q4, ahead of Mihelic’s $1.87 forecast and the Street at $1.85. He attributed the upside to stronger Global Banking and Markets and Canadian Banking results, partly offset by softness in International Banking.

The bank guided to “strong” earnings growth in 2026 excluding divestitures, supported by lower provisions for credit losses and higher revenue. Management expects net interest income to rise on loan and deposit growth and modest NIM expansion, with non-interest revenue increasing across all segments. Expense growth is expected to be modest, with productivity gains helping offset higher technology spending. The bank aims to deliver positive operating leverage in 2026.

Mihelic said the impaired PCL ratio guidance “suggests a smaller credit moderation than what we were hoping for.”

Following recent updates, he cut his International Banking estimates and raised his GBM forecasts, with mixed adjustments to Canadian Banking over 2026–27.

His core EPS forecasts now sits at $8.06 for 2026 (previously $7.99) and $9.07 for 2027 (previously $9.09).

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