Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) if often ignored by investors who prefer to buy its larger peers, but that might not be the best move over the long term.
Let’s take a look at why Bank of Nova Scotia offers a unique opportunity among the Canadian banks.
International markets
Bank of Nova Scotia is Canada’s most international bank with full-service operations in more than 30 countries.
In recent years the company has invested heavily in Latin America, spending nearly $7 billion to build its operations in the region, with a focus on Mexico, Chile, Colombia, and Peru. These countries form the core of the Pacific Alliance, a trade bloc created to encourage the free movement of capital and goods among the member markets.
The retail opportunities are significant in this region. The middle class is expanding and young professionals are demanding credit cards, lines of credit, car loans, and investment products. In total, the four countries offer access to 200 million consumers.
On the commercial side, Bank of Nova Scotia is in a great position to benefit from increased trade. Any time a company begins to do new business in another country, it needs a variety of cash-management products and services. By having a strong base in each of the core Pacific Alliance countries, Bank of Nova Scotia has set itself up to prosper from those opportunities.
In fact, the investments are already paying off.
Earnings growth
Bank of Nova Scotia just reported solid fiscal Q4 2015 results. Net income hit $1.843 billion, up 8% compared with the same period last year, and diluted earnings jumped 10% to $1.45 per share.
The Canadian operations delivered strong results in a difficult environment. Adjusted net income rose 10% to $837 million. Loans increased by 3% and deposits rose 5%.
International banking saw adjusted net income rise 33%, driven by strong asset and deposit growth in Latin America. Loans rose 17% and deposits increased 19%.
The weak link in the quarter was the global banking and markets group, which delivered net income of $325 million, down 24% compared with Q4 2014.
Risks
Bank of Nova Scotia has more of its loan book tied to the oil and gas sector than some of its peers. At the end of Q4 the company had drawn corporate oil and gas exposure of $16.5 billion, which represents about 3.5% of the company’s total loan book. Undrawn commitments represent another $14.3 billion.
The Canadian residential mortgage portfolio stands at $190 billion and is 49% insured. The uninsured component has an average loan-to-value ratio of 53%.
Further trouble in the oil and gas sector could bump up loss provisions, but the overall exposure is a small part of the total loan book.
The residential mortgage portfolio is well balanced and the housing market would really have to fall hard before the bank would see any material losses.
Dividend growth
Bank of Nova Scotia has a payout ratio of 48%, so there is little risk of a dividend cut. In fact, the company just raised the quarterly distribution to $0.70 per share. The new payout offers a yield of 4.8%.
Should you buy?
Bank of Nova Scotia offers investors a safe yield of nearly 5% and an opportunity to capitalize on growth in international markets. The market is nervous about domestic risks to the Canadian banks, but investors should view the dividend hike as a sign that management is confident about the earnings outlook.
Short-term volatility should be expected, but over the long haul this looks like a good opportunity to pick up the stock at an attractive valuation.
