Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) just reported solid Q2 2015 earnings and investors who previously shunned the bank in favour of its peers are starting to rethink that strategy.
Let’s take a look at the current situation to see if you should add the bank to your portfolio.
Earnings
In a challenging environment, the bank pulled in Q2 net income of $1.8 billion and earnings per share of $1.42. It wasn’t a home-run quarter, but the numbers pleased the market and Bank of Nova Scotia’s stock has responded well.
Net interest margins in the Canadian operations jumped to 2.26%, the best they have been in the past 12 months. The number doesn’t look big, but it is a strong indicator to investors that Bank of Nova Scotia is doing well in a tough domestic market. Assets under management increased 13%, deposits rose 4%, and loan growth hit 3%.
The international segment continues to see strong numbers coming from Latin America. Loans in the region increased 7% and deposits rose 6% compared with the same period the year before. As the company improves efficiency in the Latin American operations, profits should start to expand.
Risks
All of the Canadian banks are under careful scrutiny right now as investors look for signs of trouble connected to the rout in the oil patch.
At the moment, Bank of Nova Scotia’s exposure to the energy sector should be manageable. As of April 30 the company said $15.5 billion, or 3.4% of the company’s total loan book, consisted of drawn funds by oil and gas clients. About 60% of the loans are considered investment grade. The company also has undrawn commitments of another $12 billion that energy companies could still tap.
The other area of concern is exposure to the Canadian housing market. Bank of Nova Scotia finished the second quarter with $188 billion in outstanding residential mortgages. Half of the mortgages are insured and the average loan-to-value ratio of the uninsured loans is 53%. About 16% of the mortgage portfolio is located in Alberta.
The bank is still well capitalized, with a CET1 ratio of 10.6%. This is important because it means the company is more than capable of weathering a downturn in the housing market, or further weakness in the energy sector.
Should you buy?
The bank launched a major restructuring program late last year and investors should start to see stronger results in the back half of 2015. Bank of Nova Scotia has invested heavily in its international operations. This positions it well to benefit from growth in the strengthening Latin American markets and provides a nice revenue balance to help offset weakness in Canada.
The stock currently trades at an attractive 11 times forward earnings and 1.7 times book value. Given reasonable valuation and a solid 4% dividend, long-term investors should be comfortable buying the stock and sitting on it until they retire.
