Bank of Nova Scotia Issues Equity Linked Securities Tied to Amazon, Alphabet, and NVIDIA Performance

Structure and Underlying Stock Selection Mechanism

The Bank of Nova Scotia's equity linked securities represent a multi-asset derivative instrument where investor returns depend exclusively on the performance of the weakest performing stock among the three designated underlying equities. The structure employs a "lowest performing" methodology, meaning that on each quarterly calculation day, the bank identifies which of the three technology stocks—Amazon, Alphabet, or NVIDIA—has declined the most as a percentage of its starting price. This approach ensures that investors receive no benefit from stronger performers and absorb the full downside exposure of the weakest link in the three-stock basket.

The preliminary pricing document discloses that the estimated value of the securities, as calculated by The Bank of Nova Scotia, would range between $900.22 per security (90.022% of face value) and $930.22 per security (93.022% of face value) if the securities priced on the filing date. This valuation incorporates the dealer spread and projected profits from hedging activities undertaken by the issuer. The actual pricing supplement, when finalized, would confirm the exact coupon rate and opening prices for each underlying stock, both of which are essential inputs for calculating future contingent payments and determining automatic call eligibility.

Contingent Coupon Payment Terms and Memory Feature

The securities incorporate a contingent coupon structure with a memory feature, meaning that unpaid quarterly coupon amounts can accumulate and be paid at a later date if market conditions improve. The disclosure states that coupon payments of at least 13.90% per annum (paid on a quarterly basis) will be made only when the closing price of the lowest performing underlying stock remains at or above 50% of its starting price on the relevant quarterly calculation day. This coupon threshold creates a built-in trigger that suspends payment obligations during periods of significant underperformance.

The memory feature operates as follows: if the lowest performing stock falls below the coupon threshold on one calculation day but later recovers above it on a subsequent calculation day, the issuer must pay the contingent coupon for that recovery quarter plus all previously unpaid contingent coupons dating back to when the stock first fell below the threshold. However, if the lowest performing stock remains below 50% of its starting price on every calculation day through the life of the securities, investors receive no coupon payments whatsoever. This structure creates asymmetric risk, as investors benefit from recovery but suffer the full impact of sustained weakness without any interim coupon compensation.

Automatic Call Mechanism and Early Redemption Risk

The securities include an automatic call feature that activates if the lowest performing underlying stock reaches or exceeds its starting price on any quarterly calculation day from January 2027 through April 2029. Upon automatic call, the issuer redeems the securities at face value plus a final contingent coupon payment and any previously unpaid contingent coupon amounts. This feature effectively caps the maximum holding period to approximately 33 months from the filing date, as the securities will terminate automatically if any underlying stock fully recovers from its starting price level.

The automatic call provision introduces reinvestment risk for investors, as early redemption at face value eliminates any opportunity to benefit from further stock appreciation. Additionally, the quarterly assessment periods mean that the automatic call determination occurs at discrete intervals rather than continuously, creating timing uncertainty. Investors purchasing these securities should recognize that the expected holding period may be substantially shorter than the 36-month maturity date if technology stocks recover strongly, potentially forcing reinvestment of proceeds in a different interest rate or market environment.

Principal-at-Risk Exposure and Downside Threshold

The securities are explicitly classified as principal-at-risk instruments, meaning that investors face potential loss of their initial investment if the lowest performing underlying stock falls significantly. The disclosure specifies that if the securities are not called prior to July 26, 2029, investors will receive full face value at maturity only if the lowest performing stock's closing price on the final calculation day remains at or above 50% of its starting price (the "downside threshold"). Conversely, if that stock closes below 50% of its starting price on the final calculation day, investors will lose more than half of their initial investment and potentially lose substantially more depending on the magnitude of the decline.

The structure explicitly provides that if the lowest performing stock falls below the downside threshold, investors have full downside exposure from the starting price downward without any principal floor or protection mechanism. The filing emphasizes this risk by noting that investors "will not participate in any appreciation of any Underlying Stock and will not receive any dividends," meaning the securities offer asymmetric payoff characteristics—limited upside (capped at face value plus coupons) and potentially unlimited downside (beyond the 50% loss threshold). This construction reflects the complexity of equity-linked derivative securities and explains why estimated values fall significantly below par value even before issuance.

Credit Risk and Issuer-Specific Considerations

All payments on the securities, both coupon amounts and principal repayment, depend entirely on the creditworthiness of The Bank of Nova Scotia. The preliminary pricing supplement explicitly discloses that all payments are subject to the bank's credit risk and that the securities are senior unsecured debt obligations. Unlike conventional bank deposits, these securities carry no protection from the Canada Deposit Insurance Corporation (CDIC) or the U.S. Federal Deposit Insurance Corporation (FDIC), exposing investors to both market risk (via the linked stocks) and credit risk (via the issuing bank). If The Bank of Nova Scotia were to experience financial difficulty or default, investors would become unsecured creditors with claims subordinate to secured debt and other senior obligations.

The Bank of Nova Scotia, as a Canadian financial institution, operates under regulatory oversight from Canadian and international authorities. However, the preliminary pricing document provides no updated financial information about the bank's capital ratios, asset quality, or risk profile as of the filing date. Investors relying on the securities should conduct independent credit analysis of The Bank of Nova Scotia's current financial condition, as the preliminary pricing supplement focuses primarily on the structure and risks of the underlying equity linkage rather than the issuer's fundamental creditworthiness.

Distribution Channels and Dealer Compensation Structure

The securities will be distributed through Scotia Capital (USA) Inc., an affiliate of The Bank of Nova Scotia, which will purchase the securities from the issuer and sell them to Wells Fargo Securities, LLC (WFS) at a discount of up to $23.25 per security (2.325%). WFS then distributes the securities to retail customers through Wells Fargo Advisors (WFA), a retail brokerage business, and selected securities dealers. The preliminary pricing supplement discloses that WFA receives a selling concession of up to $17.50 (1.75%) per security and may receive an additional distribution expense fee of $0.75 (0.075%) per security for securities sold through its platform.

The Bank of Nova Scotia retains net proceeds of $976.75 per $1,000 face value security after the agent discount. The structure also permits additional fees of up to $3.00 per security (0.30%) paid to selected dealers for marketing and distribution services. These compensation arrangements create potential conflicts of interest, as broker-dealers earn higher compensation by selling these complex securities compared to simpler fixed-income instruments. The disclosure explicitly notes that Scotia Capital (USA) Inc. or its affiliates may use the pricing supplement in market-making transactions after initial sale, indicating the firm intends to maintain secondary market liquidity while capturing bid-ask spreads.

Estimated Valuation Methodology and Secondary Market Considerations

The preliminary pricing supplement discloses that the estimated value of the securities as determined by The Bank of Nova Scotia ranges between $900.22 and $930.22 per security, representing approximately 90% to 93% of the $1,000 face value. This substantial discount to par reflects the combination of the dealer spread, projected profits from hedging activities undertaken by the bank, and the value of embedded optionality within the securities. The document explicitly warns investors that "the inclusion of dealer spread and projected profit from hedging in the original offering price is likely to adversely affect secondary market prices," indicating that investors should expect the securities to trade significantly below their initial purchase price in any secondary market.

The filing emphasizes that the securities are "designed to be held to maturity" and states that "no exchange listing" is provided. This language signals that investors should expect limited liquidity outside the primary distribution period and potentially wide bid-ask spreads if they attempt to sell before maturity. The discount from face value to estimated value reflects the cost of the embedded derivatives (the contingent coupon, automatic call, and downside exposure), which are valued and captured by The Bank of Nova Scotia at issuance. Secondary market prices would reflect ongoing changes in the value of these embedded options, which are driven by changes in stock volatility, interest rates, and the current price levels of the underlying equities.

Technology Sector Concentration and Systemic Risks

The securities are linked exclusively to three large-capitalization technology companies—Amazon, Alphabet, and NVIDIA—creating concentrated sector exposure. The "lowest performing" structure means that investors absorb the performance risk of whichever of these three technology stocks underperforms its peers, without any benefit from sector rotation or diversification to other industries. The filing does not provide current stock prices or volatility metrics for these underlying equities, which are essential inputs for assessing the probability of contingent coupon payments and automatic call activation. However, the estimated valuation discount to par suggests that the bank's modeling incorporates expectations of meaningful downside risk or low probability of automatic call within the 33-month window.

Technology sector valuations, interest rate expectations, and macroeconomic conditions significantly influence the near-term performance of these three stocks. A sustained period of technology sector weakness, rising interest rates, or economic recession could push all three stocks below their starting prices, triggering the scenario where investors lose both contingent coupons and significant principal. Conversely, strong technology sector performance and stock appreciation could lead to automatic call within a short timeframe, capping investors' returns. The preliminary pricing supplement does not disclose management's expectations regarding either scenario, requiring investors to form independent views on technology sector direction and individual stock performance.

Regulatory Status and Investor Disclosure Obligations

The preliminary pricing supplement is filed pursuant to SEC Rule 424(b)(2) under Registration Statement No. 333-282565, indicating that The Bank of Nova Scotia has completed SEC registration for this class of securities. The document explicitly states that neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the securities or reviewed the accuracy and adequacy of the disclosure documents. The securities are subject to the terms described in the accompanying product supplement (Product Supplement No. WF-1, dated November 8, 2024), the prospectus supplement (dated November 8, 2024), and the base prospectus (dated November 8, 2024).

The filing carries a "Subject To Completion" notation dated July 20, 2026, indicating that the preliminary pricing supplement represents the pricing document in near-final form but subject to minor updates before issuance of the final pricing supplement. Investors receiving this document should expect confirmation of final terms, including the exact coupon rate (disclosed as "at least 13.90%"), starting prices for each underlying stock, and distribution commencement date in the final pricing supplement. The SEC registration and Rule 424(b)(2) compliance confirm that institutional investors and retail customers purchasing these securities will receive complete offering documents prior to purchase.

Comparative Valuation and Investment Suitability Assessment

The preliminary estimated value of approximately 90% to 93% of face value provides a benchmark for comparing the securities to alternative investments. A contingent coupon rate of at least 13.90% per annum applies only to the extent the lowest performing stock remains above 50% of its starting price; if market conditions deteriorate, this coupon may not materialize at all. In comparison, a conventional senior unsecured bank debt instrument issued by The Bank of Nova Scotia would offer fixed coupon payments with certainty, though likely at a lower nominal rate given the embedded options and principal-at-risk features of these securities. The meaningful discount to face value reflects the issuer's expectation that investors face meaningful probability of not receiving the full contingent coupon rate or not receiving full principal repayment.

The filing does not provide sensitivity analysis showing how changes in underlying stock prices, volatility, or interest rates would affect the securities' valuation or the probability of various payment outcomes. Investors considering these securities should perform detailed scenario analysis incorporating their views on Amazon, Alphabet, and NVIDIA stock performance over the 36-month holding period. The complexity of the embedded options, the exclusive linkage to the lowest performing stock, and the principal-at-risk structure suggest these securities are suitable only for sophisticated investors with significant risk tolerance and understanding of equity-linked derivatives.