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Is The Bank of Nova Scotia the Safest Way to Play Emerging Markets Growth?

Canadian banks have emerged from the financial crisis as formidable competitors on the global banking stage. While the risk of a pullback in Canadian house prices is increasing, the international opportunities for growth in emerging markets are very attractive.

The Bank of Nova Scotia (TSX: BNS)(NYSE: BNS) is Canada’s third-largest bank. The company operates in more than 55 countries, making it Canada’s most international lender.

A significant part of its foreign assets lie in Latin America, where the company has employed a careful but opportunistic strategy in targeting emerging economies for growth.

Here are three reasons why I think investors looking to buy a Canadian bank with exposure to growing international markets should consider Bank of Nova Scotia as their top pick.

1. Latin American growth potential

Bank of Nova Scotia’s Latin American operations are primarily focused on Mexico, Colombia, Peru, and Chile. These four countries have a combined population of more than 200 million. The population is very young and the growth of the middle class provides a fantastic opportunity for Bank of Nova Scotia to tap into the increasing demand for credit cards, car loans, investment products, insurance, and mortgages.

The bank recently announced it has signed a deal to acquire a 51% interest of Cencosud S.A.’s Financial Services business in Chile. Cencosud is the third-largest retailer in Latin America, with more than 2.5 million credit cards outstanding.

One other area the company is targeting is equity trading. In July, Bank of Nova Scotia announced its intention to set up a brokerage operation in Colombia, where the company spent $1 billion in 2011 to acquire 51% of Banco Colpatria.

Bank of Nova Scotia already has brokerage operations in the other three core Latin America countries.

2. Strong capital position

For the third quarter of 2014, Bank of Nova Scotia reported a strong Basel III common equity tier 1 capital ratio of 10.9%, up significantly from 8.9% in the same period in 2013. The ratio is a measure of a bank’s financial strength and is important for Canadian bank investors concerned about a Canadian housing bubble.

3. Dividend growth

Bank of Nova Scotia continues to reward investors with higher dividends. In its Q3 2014 earnings statement, the company increased the dividend to $2.64 per share. The current payout yields about 3.6%. Bank of Nova Scotia has paid a dividend every year since it first began the distribution in 1883.

I expect the company to continue to provide annual increases to the dividend as the international assets deliver better earnings.

4. Reasonable exposure to Canadian housing risk

The huge dark cloud hanging over the heads of all of Canada’s big banks is the risk of a meltdown in the Canadian housing market.

Bank of Nova Scotia’s Canadian residential mortgages and consumer loans as of July 31, 2014, represented 68% of the company’ total loans outstanding.

The residential mortgage portfolio is 48% uninsured and the average loan to value (LTV) of that part of the portfolio is 55%. Given the relatively low LTV level on the uninsured mortgages and the fact that more than half of the mortgages are insured, the risks appear to be manageable if there is a shock to the housing market.

The bottom line

Investors looking for a conservative way to benefit from growth in emerging markets while seeking some shelter from Canada’s mortgage risks should consider The Bank of Nova Scotia as a top pick. The bank takes a very conservative approach to building its international operations, has a rock-solid capital position, and is less likely than some of its peers to be crushed by a Canadian housing meltdown.

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

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