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Bank of Nova Scotia: Buy, Sell, or Hold?

Shares of the Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) are down more than 15% in the past seven-and-a-half months and investors are wondering if they should get in, get out, or hold on for the ride.

Let’s take a look at Canada’s third-largest bank to see if it deserves to be in your portfolio.

Earnings

Bank of Nova Scotia recently reported earnings for the quarter ending on January 31. The bank missed analyst expectations but still delivered decent results. Net income for Q1 2015 came in a $1.73 billion, roughly equal to the same period in 2014. Diluted earnings per share were $1.35, compared to $1.32 in Q1 2014. Return on equity fell in the quarter to 14.2%, compared with the performance of 15.4% a year earlier.

The company actually delivered stronger net interest margins in Q1 2015 than it did in the same quarter last year.

Bank of Nova Scotia’s international operations are struggling with expenses. The division reported a 2% year-over-year drop in net income, despite strong loan growth and higher revenue in Latin America, where the bank gets the bulk of its foreign earnings.

Last November, the company announced a major restructuring of the Latin American operations. Investors should see better numbers moving forward, once the process is complete.

Dividend growth

Bank of Nova Scotia recently increased its quarterly dividend by two cents per share to $0.68. The annualized payout of $2.72 currently yields about 4.3%. The bank has paid investors a dividend every year since 1833 and raised the payout in 42 of the past 45 years.

In the past five years alone, Bank of Nova Scotia increased the dividend seven times.

Oil and gas exposure

The rout in the oil patch is a big concern for bank investors. Bank of Nova Scotia said that its drawn oil and gas exposure was $15.4 billion, or 3.4% of its total loan book at the end of the first quarter. The undrawn commitments were another $12.7 billion. The bank said 65% of the drawn exposure is investment grade.

Mortgage exposure

The company had $189 billion in Canadian residential mortgages on the books as of January 31. Uninsured mortgages represented 48% of the loans and the average loan-to-value ratio in that segment was 55%. Roughly 16% of the total mortgage portfolio is located in Alberta.

Valuation

The bank currently trades at 10.5 times forward earnings and 1.6 times book. The five-year averages for the bank are 12.3 times earnings and 2.1 times book.

What should investors do?

The Bank of Nova Scotia is a solid long-term investment. If you already own the shares, you should probably hold them. New investors with a plan to own the stock for several years should also be comfortable getting in at this point, given the attractive valuation.

However, the trend still looks like it is moving to the downside, and technical pundits would say that the stock could move quite a bit lower if it breaks below the $61 mark. A further deterioration in the oil sector will put pressure on the loan portfolio that is tied to Alberta, but this represents a small portion of the bank’s overall lending.

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

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