The Bank of Nova Scotia: Should You Buy Now or Bail Out?

The Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is undergoing a major restructuring process. Here’s the scoop on the near-term outlook for the bank.

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The Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is down more than 15% in the past six months and investors are wondering if the stock is finding a bottom, or is simply halfway down an extended pullback.

Let’s take a look at the current situation to see if you should add the Bank of Nova Scotia to your portfolio.

Restructuring

In early November, the Bank of Nova Scotia announced a major restructuring plan aimed at improving operations in its international business units. The company took a one-time charge of $451 million, which included $129 million for bad investments in Venezuela and $109 million for bad loans in the Caribbean. The most interesting news is the shift in focus from Mexico to Colombia and Chile. The bank will close roughly 120 international branches and reduce staff by 1,500.

The reduction in expenses is expected to lead to cost savings in the order of $120 million per year going forward.

Brian Porter, the Bank of Nova Scotia’s CEO, has made several changes to his senior management team in his first year as the company’s leader. The recent restructuring announcement meant pink slips for the head of all the Latin American operations, as well as the head of the Mexican unit. Earlier in the year, Porter changed his wealth management head, marketing head, capital markets head, chief operating officer, and chief risk officer.

A game of musical chairs is expected any time there is a CEO change at a bank, but the scope of the overhaul in such a short period of time suggests the Bank of Nova Scotia is facing difficulties in all areas of the business.

On the positive side, the aggressive moves send a signal to the market that Porter is determined to right the ship quickly.

Credit quality

Provisions for credit losses (PCL) hit their highest levels for the year in the company’s Q4 2014 report, which covered the period ended October 31. Accelerated charges for bankrupt retail accounts and other loan losses drove the PCL ratio for the fourth quarter to 0.53%, with larger provisions for the Canadian and Caribbean retail accounting for most of the pain. The adjusted Q4 PCL ratio was 0.37%. The number is acceptable, but higher than the PCL at some of the other banks.

The Bank of Nova Scotia had $189 billion in Canadian residential mortgages on the books as of October 31, 2014. Uninsured mortgages accounted for 48% of the portfolio and the average loan to value (LTV) ratio on the uninsured portion was 54%.

Concerns for 2015

One item investors should watch carefully is the fact that 15% of the Bank of Nova Scotia’s outstanding residential mortgages are located in Alberta. With the oil industry facing a possible meltdown, the portfolio could start to see higher defaults in the second half of this year.

Should you buy?

The Bank of Nova Scotia has increased its dividend by 35% in the past four years and the stock has gained about 9% in the same time period. The performance had trailed most of its peers, primarily due to the heavy focus on international growth. The dividend of $2.64 per share yields about 4.3%.

As a long-term bet, The Bank of Nova Scotia should be a good investment. The focus on international markets provides a hedge against weakness in Canada, and the the growth potential in Latin America is compelling. However, the stock is in a downward trend and most of the Canadian banks, including the Bank of Nova Scotia, have warned that 2015 will be tough. Although the stock currently trades at an attractive 11 times earnings, the Bank of Nova Scotia is probably a hold right now. New investors might see a better entry point in the coming months.

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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