The Canadian banking industry has not only survived the great recession, it has also been able to take advantage of opportunities around the world to add great assets at compelling prices.
For investors with a long-term perspective, Canada’s big banks such as Toronto-Dominion Bank (TSX: TD)(NYSE: TD) and Royal Bank of Canada (TSX: RY)(NYSE: RY) have provided generous returns through increased dividends and capital appreciation.
I think that trend will continue and one bank in particular should be on the radar of every conservative investor looking for a long-term winner.
Bank of Nova Scotia (TSX: BNS)(NYSE: BNS) is Canada’s third largest bank. With operations in more than 55 countries, it is also Canada’s most international lender. Much of the bank’s foreign presence is in Latin America where Bank of Nova Scotia has taken a cautious and measured approach to investing in emerging economies.
Its core focus is in Mexico, Colombia, Peru, and Chile. With a combined population base of over 200 million people, these countries offer huge potential for foreign banks. The four countries represent roughly 40% of GDP in the region and 50% of trade.
Besides the obvious commercial banking opportunities, the retail potential might be the most attractive. Young professionals and a growing middle class are now demanding credit cards, car loans, mortgages, insurance, and wealth management products.
Last week, Bank of Nova Scotia announced it’s launching an equity trading brokerage in Colombia. The bank has already successfully established similar operations in the three other countries.
Bank of Nova Scotia normally buys a minority ownership stake in a local financial institution to get a sense of the potential and then increases its position in the foreign bank as it becomes more comfortable with the opportunity. In recent years it has made bigger bets. In 2011, it bought a 51% stake in Colombia’s Banco Colpatria for $1 billion. The bank is now targeting opportunities in Asia.
Bank of Nova Scotia had Q2 2014 net income of $1.8 billion, up 14% from the same period in 2013. Its recent purchase of Canadian Tire Financial Services shows it is also open to making strategic domestic investments.
Its capital position is very strong and continues to strengthen as its Common Equity Tier 1 capital ratio rose to 9.8% in Q2 2014 from 8.6% the year before. This ratio is a measure of the bank’s financial strength.
The bank currently pays a 3.5% dividend. The payout has increased nearly every year since its inception in 1883, and should continue to increase as earnings from the growing international operations continue to rise.
Risks?
Concerns about a Canadian housing bubble are certainly warranted and a correction will have an impact on all of Canada’s big banks, including Bank of Nova Scotia. The diversified nature of its operations should soften the blow when increasing interest rates halt the Canadian debt binge.
Stock prices in all the banks are up significantly in the past year. Investors might want to wait for a pullback to initiate a position.
Over the long haul, I think Bank of Nova Scotia will continue to reward conservative investors with consistent returns.
