The shares of Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) have fallen more than 15% since the end of July and investors are wondering if now is a good time to start a position in the stock.
Let’s take a look at the situation to see if Canada’s third-largest bank deserves to be in your portfolio.
Earnings
Bank of Nova Scotia, also known as Scotiabank, missed analyst expectations when it reported Q1 2015 results in early March. The bank reported net income of $1.73 billion for the quarter, a 1% increase over the same period in 2014.
The Canadian banking division delivered a 6% gain in net income, driven by strong wealth management earnings and higher net interest margins. Loan growth for the quarter came in at 4% and deposits increased by 3% compared to Q1 2014.
Assets under management improved by 15%.
Bank of Nova Scotia has the largest international presence of the big five banks. The majority of the focus is in Latin America, where the company has struggled to improve profits despite strong revenue growth.
In Q1 2015, the international division enjoyed loan growth of 10% and deposits increased by 8% compared to the previous year, but net income dropped 2%.
Earnings headwinds are facing all of the Canadian banks. Bank of Nova Scotia missed consensus estimates for Q1 but the company continues to deliver strong results in a tough operating environment.
Restructuring
In November 2014 Bank of Nova Scotia announced a major restructuring. The company took a one-time charge of $451 million and planned to eliminate 1,500 jobs. The process is ongoing, with much of the focus on the Latin American operations. Investors should start to see the positive effects of the move turn up in the numbers in the second half of 2015.
Risks
There has been a lot of chatter in recent months about the potential effects that the oil crisis will have on bank earnings. Bank of Nova Scotia finished Q1 2015 with corporate oil and gas exposure of $15.4 billion, representing just 3.4% of the company’s total loan book. The energy sector also had another $12.7 billion in available undrawn credit.
Pundits are also fretting about the possible popping of the presumed housing bubble. Bank of Nova Scotia had $189 billion in Canadian residential mortgages on the books by the end of the first quarter. The company says 48% of the portfolio is uninsured and the loan-to-value ratio on that component is 55%. Alberta accounted for $30 billion, or about 16%, of the total mortgage portfolio.
The company remains well capitalized with a Basel III CET1 ratio of 10.3%, which means Bank of Nova Scotia is easily capable of managing some weakness in the loan portfolios caused by a further deterioration in the energy sector or a slowdown in the housing market.
Dividends
Despite the weaker-than-expected earnings, Bank of Nova Scotia increased its quarterly dividend by two cents. The annualized payout of $2.72 per share yields about 4.3%. The company has increased the dividend eight times in the past five years.
Should you buy?
Bank of Nova Scotia currently trades at an attractive 10.4 times forward earnings and 1.6 times book value. These metrics are significantly better than their five-year averages. With the major restructuring set to take out costs and drive more efficiency into the bank’s operations, long-term investors should see the current weakness in the stock as a buying opportunity.
