Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is Canada’s most international bank, and investors are wondering if that makes it a safe pick in the current environment.
Let’s take a look at the company to see if it deserves to be in your portfolio.
International focus
Bank of Nova Scotia is betting big on future growth in emerging markets. The company already has full-service operations in more than 30 countries, but its largest investments have been in Latin America.
Over the past five years the company has spent more than $7 billion to acquire assets in Mexico, Colombia, Chile, and Peru. These countries form the core of the Pacific Alliance, an economic trade bloc set up to encourage the free movement of capital, goods, and labour. The four countries have already integrated their stock markets and reduced trade barriers by more than 90%.
With a strong foothold in each country, Bank of Nova Scotia is strategically positioned to take advantage of the increase in trade among the member states.
How?
When businesses expand their reach to other countries, they require a wide variety of cash management services as well as new loans and lines of credit. By having a recognized presence in each market, Bank of Nova Scotia can capitalize on the growth in trade.
The commercial opportunities are just one side of the coin. Bank of Nova Scotia is also betting on growth in Latin America’s retail market.
The four main countries in the Pacific Alliance have a combined population of about 200 million. The younger generation is well educated and starting to earn more money. As wealth expands, Latin America’s millennials are increasing their demand for credit cards, car loans, and investment services.
Earnings
The international division delivered net income of $485 million in the most recent quarter, an 11% increase over the same period in 2014. Latin American loans increased by 12% and the company saw a solid increase in assets under management.
In Canada, Bank of Nova Scotia continues to perform well, despite the headwinds facing the economy. Adjusted net income in the company’s third quarter hit $863 million, up 15% from the same period last year. Loans and deposits rose by 3% and assets under management jumped 13%.
Dividends
Bank of Nova Scotia recently raised its quarterly payout by two cents to $0.70 per share. That’s good for a yield of about 4.9%. The dividend hike is important because it tells investors that management is confident in both the earnings outlook and the risk profile of the loan portfolio.
Should you buy?
Bank of Nova Scotia is a solid long-term bet, and is now trading at a very attractive 9.5 times forward earnings and 1.4 times book value. It isn’t often investors get a chance to buy the stock at such a discounted price.
Further weakness could be in the cards in the coming months, but you now get paid nearly 5% to sit back and wait for better times. At some point, the market will revert back to the historical multiples, so it might be worthwhile to get in ahead of the curve.
