After a tough couple of years marked by a 28% decline, shares of Bank of Nova Scotia (TSX:BNS) have made a strong comeback in 2024. With a 22% year-to-date gain, BNS stock is now trading at $78.37, supported by a market cap of $97.6 billion. This recovery reflects a renewed confidence in the bank's ability to navigate a challenging macroeconomic environment while having the potential to benefit from easing inflation and declining interest rates. However, as we approach 2025, investors are wondering whether this momentum can continue.

Before diving into BNS stock's 2025 outlook, let's quickly review the key fundamental factors that contributed to its recovery in 2024.

Key factors behind BNS stock's rally in 2024

The strength in Scotiabank's financial performance in recent quarters could be one of the main reasons for driving investor confidence. Several key factors, including strength in its Canadian banking operations, a recovery in the international banking segment, and wealth management growth, have helped BNS stock regain its footing in 2024.

In its fiscal year 2024 (ended in October), Scotiabank's net profit climbed by about 6% YoY (year over year) to $7.9 billion with the help of strong revenue growth, strategic focus on its core markets, and improved operational efficiencies. Notably, the bank's Canadian banking division delivered a 7% YoY increase in adjusted earnings to $4.3 billion as a result of robust volume growth and margin expansion. Scotiabank's focus on managing expenses within the Canadian market also contributed to positive operating leverage, improving its profitability from this core segment.

Meanwhile, many key factors, such as margin expansion, disciplined cost management, and the favourable impact of foreign exchange rates, drove a recovery in its international banking segment last fiscal year, helping it post an impressive 11% adjusted earnings growth from a year ago.

BNS stock's 2025 outlook

As we move into 2025, the outlook for BNS stock largely looks optimistic. The bank's solid 2024 performance, supported by strength across its Canadian and international segments, has laid a strong foundation for continued growth. Besides Scotiabank's strategic focus on core markets like Canada and Latin America, its ability to deliver positive operating leverage through disciplined cost management and revenue growth will be key to sustaining its momentum in 2025.

Bank of Nova Scotia's Canadian Banking division is expected to continue benefiting from strong demand in residential mortgages and personal loans, coupled with stable deposit growth. In addition, its investments in technology and digital transformation should also help it improve operational efficiency further, which could expand its profitability.

Easing inflation and declining interest rates are also likely to play a significant role in shaping Scotiabank's 2025 outlook. Lower interest rates could stimulate borrowing activity, driving growth in both retail and commercial loans. This trend, combined with easing inflation, may also have a positive impact on consumer spending, creating favourable conditions for the bank's Canadian operations to perform well.

In addition to these strong fundamentals, BNS stock's strong 5.4% annualized dividend yield makes it even more attractive for income-focused, long-term investors in Canada heading into 2025.