I came across an interesting article about Scotiabank, also known as The Bank of Nova Scotia (BNS). The article points out a few risk factors that seem to have gone unnoticed. Instead of taking a comprehensive approach, the analysis dives into micro factors, aiming to shed light on some critical aspects of Scotiabank’s stock.

One of the major risks worth mentioning is the increasing uncollectible interest payments for the bank. In the second quarter, there was a significant rise in retail interest payments that hadn’t been collected within 90 days. This, coupled with a year-over-year increase of $490 million in loan provisions, suggests a potential crunch on household loans, both in Canada and on an international scale.

It appears that the bank’s exposure to auto loans and short-term credit card debt has led to a rise in provisions for loan losses. This isn’t surprising, considering the current situation in the banking industry, but it still poses a considerable risk.

The Canadian real estate market also adds to the bank’s risk profile. About 73% of Scotiabank’s mortgage portfolio is uninsured, and roughly 36% consists of variable-rate loans. With the current crunch in the Canadian real estate market, this could spell trouble for the bank’s balance sheet.

Looking at the commercial real estate loan portfolio, it’s worth around $67.1 billion, which isn’t much compared to the bank’s total asset base. Nonetheless, the risk attached to commercial real estate loans shouldn’t be ignored, especially in today’s economy. Risk premiums on such loans might be underestimated, given the credit crunch and significant counterparty risk that could be looming.

Another critical risk lies in the trading revenues. The ongoing levels of value-at-risk on trading revenues could lead to unwanted risks for investors, especially with interest rates on the rise and global yield curves facing challenges.

Scotiabank’s growth strategy includes exposure to emerging markets, which makes sense for long-term trend growth. However, it also brings volatility to the table, and if the global economy continues to tighten, the returns may not be as impressive as expected.

Now, let’s talk about the bank’s valuation. According to the continuous residual income model used in the article, Scotiabank’s stock is in fair value territory. While this isn’t a substantial risk, it does indicate that most investors have already priced in the positives.

I’m not overly pessimistic about Scotiabank’s prospects, but it’s essential to consider the potential risks. Extended payables on retail debt and exposure to commercial debt could be significant threats. Additionally, the valuation model suggests that the stock may not have much upside potential left.