Is it Safe to Buy Bank of Nova Scotia?

Here’s what investors need to know about Bank of Nova Scotia (TSX:BNS)(NYSE:BNS).

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The Motley Fool

Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is the most international of Canada’s Big Five banks, and investors are wondering if this is a positive for the stock in the current economic environment.

Let’s take a look Bank of Nova Scotia to see if it deserves to be in your portfolio right now.

International diversification

Bank of Nova Scotia has operations in more than 50 countries, but the largest part of the overseas business lies in Latin America.

The bank sees excellent long-term growth opportunities in the region, and has invested more than US$7 billion to build a solid banking operation focused on Mexico, Colombia, Chile, and Peru.

These four countries make up the core of the Pacific Alliance, a trade bloc created to promote the free movement of goods, services, people, and capital among the member states. To date, the four countries have already integrated their stock markets and removed more than 90% of the trade barriers that previously existed.

As businesses expand their reach into the four markets, they need a wide variety of additional banking products and services. Bank of Nova Scotia is in a strong position to benefit because it has an established brand in all four countries.

The corporate opportunities are one part of the puzzle, but the bank is also targeting the more than 200 million people who live in the trade bloc.

As the middle class expands, so does demand for credit cards, car loans, lines of credit, and investment products.

Bank of Nova Scotia’s Latin American investments are starting to pay off. In the latest quarterly report, the international banking division delivered net income of $485 million, a year-over-year increase of 11%.

The solid results were driven by 12% loan growth in Latin America as well as higher assets under management.

Canadian banking

Back at home, Bank of Nova Scotia continues to perform well, despite the economic headwinds.

Adjusted net income came in at $863 million for the most recent quarter, up 15% from the same period last year. Loans and deposits increased by 3% and assets under management rose 13%.

The bank is working through a major restructuring process, and investors are already starting to see the benefits of those efforts.

Dividend stability

Bank of Nova Scotia just increased its quarterly dividend by two cents per share to $0.70. The distribution is extremely safe and yields a solid 4.7%. Investors should view the hike as a sign that management is comfortable with the overall earnings outlook.

Loan risks

As of July 31, Bank of Nova Scotia had $189 billion of Canadian residential mortgages on the books, of which, 48% are insured and the loan-to-value ratio on the rest is 53%.

The bank also has drawn oil and gas exposure of $15.8 billion, which represents about 3.4% of the total loan book. This is higher than some of the other banks, but still very manageable.

The company has another $13.5 billion in undrawn commitments in the energy patch. Investors should watch the next quarterly report to see if that number changes materially.

Bank of Nova Scotia is well capitalized with a Basel III CET1 ratio of 10.4%. This means it is more than capable of riding out further weakness in the energy sector and can handle a meaningful pullback in the housing market.

Should you buy?

As a long-term bet, Bank of Nova Scotia is a solid investment. The stock currently trades at 10 times forward earnings and 1.5 times book value, which are attractive metrics compared with the five-year average.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker has no position in any stocks mentioned.

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