Bank of Nova Scotia

Bank of Nova Scotia (TSX: BNS) is a global financial services provider. The bank has five business segments: Canadian banking, international banking, global wealth management, global banking and markets. Its international operations span numerous countries and are more concentrated in Central and South America.

• Growing risk of broader market correction: The resurgence in Delta variant cases and the latest episode of Chinese real estate giant “Evergrande” is throwing a lot of uncertainties. It might cause a volatility in the equity market, as a result the company might witness lower AUM and deposits which could further impact its operations and cash flows. Lastly Bank of Canada terminated its “QE program” and said rate hikes are likely to happen by mid-2022.

• Sequentially degrading Net Interest Margin: Despite the strong operating performance across sectors, the bank's NIM is falling on the sequential basis. In Q3 2021 its NIM ratio was at 2.2%, compared to the industry median of 3.06%.

• Lower efficiency ratio: Moreover, its net efficiency ratio in the reported period is weaker at 52.8% compared to an industry median of 56.5%. For financial businesses, the health of this ratio is essential, and any decline in this ratio is not considered a good sign.

• Trading near the upper band of the Bollinger Bands: Recently, the stock witnessed a healthy rally on the daily price chart and has moved close to the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the momentum oscillator RSI (14-Period) is trading at ~70.55 levels, which also indicates that the stock is in overbought zone and there is a deep possibility of price consolidation or correction.

      Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): Price to Book Value

Stock recommendation

The organization delivered another quarter of strong results, with contributions from all of its operating segments, reflecting the benefits of a well-diversified business model. However, its NIM and efficiency ratios are at the lower end compared to industry median, which is an area of concern. Additionally, the debt problem at China's Evergrande has sparked fears of a market correction, meanwhile the Bank of Canada terminated its “QE program” and said rate hikes are likely to happen by mid-2022. These issues are anticipated to have an impact on the broader equities market which could bring volatility. Even on the technical front the stock price has moved close to the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation.  Therefore, based on the rationales discussed above and valuation, we recommend a "Sell" rating on the stock at the closing price of CAD 82.60 on October 27, 2021. 

Timbercreek Financial Corp

Timbercreek Financial Corp (TSX: TF) is a Canada-based non-banking commercial real estate lender. The Company provides shorter-duration, customized financing solutions to professional real estate investors.

Why Investor’s Should Book Profit?

• Balance Sheet Risk- Higher debt: The company’s Debt/Equity ratio stood at 1.59x as of June 30, 2021, increased from 1.47x as of March 31, 2021, and significantly higher compared to industry median of 0.25%. This poses a significant balance sheet risk for the investors.

• Poor Debt Protection Metrices: Company’s debt protection metrices are quite weak when compared with industry median, Net Debt is approximately 56.7 times of the EBITDA whereas the industry median is approximately 1.76x.

• Bearish Engulfing on Daily Price Chart: On daily price chart, a bearish engulfing candle has been appeared after the recent uptrend. Moreover, the leading momentum indicator 14-day RSI has also recorded sharp reversal from 61 to 51, indicating a potential downside from the current trading level.

Technical Price Chart (October 27, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Stock Recommendation

Given the heightened volatility over the global equity market on the back of heightened inflationary pressure and  slower than expected revival in the economy, we believe booking profit in a staggered manner would play out well for the investors.  Moreover, interest rate hike is coming soon to control inflationary pressure, which will accelerate defaults as many businesses are still struggling from the COVID-19 led disruption took place lately. Further,  a bearish engulfing candle appeared on the daily price chart, which is indicating  a potential reversal from the current uptrend in the stock. Hence, we recommend a “Sell” rating at the closing price of CAD 9.77 (October 27, 2021).

Technical Price Chart (October 27, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.