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Why Bank of Nova Scotia Is a Smart Play Despite the Weak Canadian Economy

Bank stocks are often considered some of the best investments that can be made; however, when particular sectors of an economy start to go sour, investors begin to question whether or not banks are all that worthwhile. Bank of Nova Scotia  (TSX:BNS)(NYSE:BNS), the third-largest Canadian bank by market cap, has experienced investor doubt. The primary driver of that doubt is the significant drop in commodities and oil.

Fortunately, I don’t anticipate the oil industry to harm the bank all that much. Bank of Nova Scotia only has 3.5% of its total loan book exposed to the oil industry. Even better, its impaired loans only account for 0.44% of the total value of the bank’s portfolio of loans. In other words, while the oil industry is hurting, Bank of Nova Scotia is not at risk.

Part of the reason why Bank of Nova Scotia doesn’t have that much exposure to the Canadian oil industry is because it is the most international of the Canadian banks with 21 million customers in Latin America, Asia, and the Caribbean. In fact, it is that exposure to Latin America that immediately makes me believe that this bank is worth investing in.

In Colombia, Bank of Nova Scotia is the fifth-largest bank. In Mexico, it is the seventh-largest bank. While that might not seem all that impressive, the number of people that Bank of Nova Scotia has exposure to is significantly greater in Latin America than in Canada.

Take Colombia, for example. The country has 48.3 million people with 43 people per square kilometre. In Mexico, there are 59.79 million people with 65 people per square kilometre. Compare that with Canada; it has a population of only 35.2 million with four people per square kilometre. Population density means each bank branch can handle more customers, thus reducing the need for expensive infrastructure.

Chile is another country that gives Bank of Nova Scotia serious growth. Last year it bought 51% of Cencosud SA, which is Chile’s biggest retail bank. In Latin America, Chile is the most advanced economy, so this was a big move for the Canadian bank. I anticipate this to pay dividends for Bank of Nova Scotia over the coming years.

To get an idea on how successful the international market has been for Bank of Nova Scotia, just look at its quarterly numbers. Year over year, it has seen a 33% increase in net income. Quarter over quarter, net income has grown 4%. Part of the reason this is occurring is because of the net interest margin, which is the range between what the bank can lend and what it has to pay its depositors. According to Bank of Nova Scotia, its fourth-quarter net interest margin was 4.7%, which is double what the bank can earn in Canada.

All of this growth is making Bank of Nova Scotia a really attractive stock going into 2016 and for the future. Even while the growth is taking place, Bank of Nova Scotia is able to pay a 4.83% at $0.70 per quarter, which is significantly greater than the industry average.

The one thing to remember is that international economies tend to be a little more volatile than more established ones. Therefore, Bank of Nova Scotia could have some bad quarters; however, so long as these economies continue to grow, Bank of Nova Scotia should expect to generate significant income.

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Fool contributor Jacob Donnelly has no position in any stocks mentioned.

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