4 Reasons to Add Bank of Nova Scotia to Your Portfolio

Here’s why Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) looks attractive right now.

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The Motley Fool

Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is often overlooked in favour of its larger competitors, but the bank deserves more respect.

Here’s why.

1. Earnings strength

Bank of Nova Scotia just released strong fiscal Q1 2016 results that beat analyst expectations. The company reported net income of $1.8 billion, up 5% compared with the same period last year. Revenue growth was 9% and diluted earnings per share increased 6% to $1.43.

The results are impressive considering the economic headwinds faced by the Canadian banks.

2. Balanced revenue stream

Bank of Nova Scotia is Canada’s most international bank with operations in more than 55 countries.

Most of the foreign investment in recent years has been focused on Latin America, with Mexico, Colombia, Chile, and Peru receiving most of the attention.

Why?

The four countries are the core partners in the Pacific Alliance, an economic bloc set up to enable the free movement goods and capital among the member states.

Bank of Nova Scotia has battled with high costs in the region, but recent restructuring efforts are starting to bear fruit and the international division is putting up strong numbers.

Net income for Q1 2016 in the international group came in at $505 million, up 21% compared with Q1 2015. Loans increased 19% and deposits rose 27% on a year-over-year basis.

The Canadian banking division also delivered strong results, despite the difficult market conditions. Net income in Q1 2016 rose 7% to $875 million. Loan growth was 4% and deposits increased by 7% compared with the first quarter last year.

The global banking and markets group had a weak quarter compared with the previous year. Net income from the segment came in at $366 million compared to $404 million in Q1 2015.

The international investments are starting to really pay off and should continue to provide a nice earnings hedge against weakness in the Canadian market.

3. Dividend growth

Bank of Nova Scotia just raised its quarterly dividend by two cents to $0.72 per share. The distribution offers a yield of 5%.

Investors should see the increase as a signal that management is confident in the earnings prospects, despite some of the near-term challenges.

4. Valuation

The stock has rallied off the recent lows but still trades at an attractive 10 times earnings and just 1.4 times book value, which is significantly below the five-year average.

Risks?

Bank of Nova Scotia has higher exposure to the energy sector than most of its peers. As of January 31, total drawn energy loans sat at $17.9 billion with 60% of the loans being rated as investment grade.

The company also has another $14.1 billion in undrawn energy exposure, of which 75% is considered to be investment grade.

If the oil and gas rout continues through the end of 2016, loss provisions could increase, but the overall impact is manageable. The drawn loans represent just 3.6% of the total loan book, and the bank is well capitalized with a CET1 ratio of 10.1%.

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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