The recent pullback in the equity markets is giving long-term investors a good opportunity to add quality stocks to their portfolios.
In the financial sector, the Canadian banks are considered anchor holdings. However, given the precarious state of the Canadian housing market and the recent run up in share prices, where should an investor put new money in the sector?
1. Diversified earnings
The Bank of Nova Scotia may be Canada’s third largest bank, but it is number one when it comes to international operations.
In its Q3 2014 earnings statement, Bank of Nova Scotia reported its net income came from four specific sectors: Canadian banking accounted for 33%, international banking contributed 24%, global banking and markets added 24%, and global wealth and insurance supplied 19% of profits.
This diversification will be very important moving forward. Canadian retail customers are already sitting on record levels of debt, and there is a limit to how much profit the Canadian banks can squeeze out of this market given the current situation.
2. The Latin American economic revolution
As Canada’s most international lender, Bank of Nova Scotia is focused on building a leadership presence in markets where high-margin product penetration is much lower than in Canada and the U.S.
In Latin America, Bank of Nova Scotia operates in Mexico, Chile, Peru, and Colombia. The combined population in these four markets tops 200 million and the average age is much younger than that of the U.S. and Canada. The Bank of Nova Scotia hasn’t chosen these four countries on a whim.
As economic growth expands and political stability takes root, the young people in Latin America are becoming more affluent and demanding services such as credit cards, mortgage loans, lines of credit, insurance, and investment products.
The governments of these four countries also realize the power of merging markets and enabling free trade. A new trade agreement between Mexico, Colombia, Chile, and Peru will eliminate tariffs on 92% of all goods moving between the four countries.
The result will be greater opportunity for small businesses to buy and sell goods in all four markets. When this happens, these companies will require a host of financial services including foreign exchange, trade financing, and cash management.
Because The Bank of Nova Scotia has operations in all four markets, the opportunity to provide financial products and services to these small and medium businesses is massive.
The four Latin American economic powerhouses have also set up a platform for the free movement of capital. The Latin American Integrated Market is the result of the unification of the four stock exchanges. There are more than 750 companies trading on the exchange. Their combined market value is greater than $1 trillion.
The Bank of Nova Scotia is setting up brokerage operations in all four countries to take advantage of the demand for trading services.
3. Manageable Canadian retail risk
The company’s Basel III common equity Tier 1 capital ratio on July 31 was a solid 10.9%. As a measure of the bank’s financial strength the ratio is important for investors in the event that a serious financial crisis occurs.
4. Share appreciation and dividend growth
As a long-term holding, The Bank of Nova Scotia is tough to beat. The company has paid a dividend every year for more than a century and the stock has risen more than 85% in the past 10 years.
The bottom line
The recent weakness in the stock might continue in the short term, but the pullback should be seen as a long-term buying opportunity.
Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.
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.