On Tuesday, The Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) reported results for the first quarter of 2015, and the numbers can be summed up in one word: unremarkable.
Net income came in at $1.7 billion, or $1.35 per share. This was 2% higher than last year, but missed analyst estimates of $1.38 per share. The bank also raised its dividend by only by two cents.
So, investors can be forgiven for feeling a little underwhelmed. That said, beneath the surface, there are some compelling reasons to buy The Bank of Nova Scotia’s shares. We reveal the top three reasons below.
1. Strong risk management
This is something of great importance to investors these days, since Canadian bank stocks seem especially risky in this environment. Fortunately, risk management is something The Bank of Nova Scotia does very well.
Let’s start by looking at Canada, where credit losses totaled just 0.23% of total loans on an annualized basis. How are losses kept so low? First of all, three-quarters of the loan book is in mortgages, where loan losses totaled just 0.01% of the total portfolio. Most of these mortgages are insured, meaning there’s no credit risk at all. So, even if the Canadian economy starts to struggle, you’re unlikely to see skyrocketing loan losses.
To be fair to the other banks, they are able to post similarly impressive numbers. However, The Bank of Nova Scotia has one distinct advantage: its international presence.
2. An international presence
The Bank of Nova Scotia is known as “Canada’s most international bank,” and rightly so. It has extensive operations outside of Canada, mostly concentrated in Latin America. Last year, 44% of adjusted income came from foreign markets.
This comes with a number of advantages. First of all, it should allow the bank to grow for many years to come—the countries where it operates tend to be stable democracies, have high economic growth rates, and have underbanked populations. Second, this international presence helps diversify the bank away from Canada, a country that many investors are worried about.
Granted, the international business has struggled over the past year. This quarter was no different, with international banking net income down 2% year over year, despite a 10% increase in loans. Still, when looking over a longer time period, these international markets are a big strength for the bank.
3. A cheap price
Based on Monday’s closing price, The Bank of Nova Scotia trades at 11.7 times earnings. This is a very low number for any company in any industry with such a presence in emerging markets.
Furthermore, this comes after some not-so-spectacular results over the past year. The bank has plenty of opportunity to grow earnings simply by getting its international bank business back on track. Once this is done, I would expect the share price to move meaningfully.
