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1. International exposure
Bank of Nova Scotia is Canada’s most international bank. The company has full-service operations in more than 30 countries, but the main focus in recent years has been on Latin America.
You might think the strategy is a risky one, and the market appears to agree as Bank of Nova Scotia’s stock performance has trailed its peers over the past five years. But the long-term story in the region is an interesting one, especially in Mexico, Peru, Colombia, and Chile where the bank is focusing its investments.
These four countries form the core of the Pacific Alliance, a trade bloc set up to promote the free movement of capital, goods, and labour. Combined, the member states offer a market of 200 million consumers. Bank of Nova Scotia identified the opportunity early on and has spent more than $7 billion to build a strong operation in the region.
As the middle class expands, people are demanding credit cards, car loans, lines of credit, and investment vehicles. The penetration for these products is lower than it is in Canada, so the growth potential is significant.
The commercial opportunities are also appealing. Each time a company enters a new market it needs a wide variety of new cash-management services. With its strong network in the four countries, Bank of Nova Scotia is well positioned to benefit from the trade growth.
Canada is facing some economic headwinds right now, so it makes sense for investors to buy stocks with significant revenue streams coming from other markets.
2. Strong earnings
Bank of Nova Scotia reported strong fiscal Q4 2015 results. Net income for the quarter rose 8% compared with the same period in 2014, and diluted earnings rose 10% to $1.45 per share.
The bank’s Canadian operations delivered solid numbers compared with Q4 in the previous year. Deposits increased 5%, loans rose 3%, and adjusted net income jumped 10% to $837 million.
On the international side, the results were quite impressive. Income rose 33% to $504 million on the back of a 19% increase in deposits and a 17% rise in loans.
3. Dividend safety
Bank of Nova Scotia raised its dividend by 6% in 2015. The current quarterly distribution of $0.70 yields about 5.3%. The payout ratio is 48%, so the dividend should be very safe.
4. Manageable risks
Bank of Nova Scotia holds $190 billion of Canadian residential mortgages. The uninsured portion represents 51% of the loans and the loan-to-value ratio on that component is 53%. This means the housing market would have to fall significantly before the bank would see any material impact.
Most analysts expect a gradual decline in Canadian house prices.
On the energy side, Bank of Nova Scotia finished Q4 2015 with drawn energy exposure of $16.5 billion, which represents about 3.5% of the total loan book. As the oil rout continues, loss provisions are expected to increase, but the company is very capable of absorbing the hit.
5. Attractive valuation
Bank of Nova Scotia currently trades at 9.8 times trailing earnings, which is much lower than the 11.8 times the stock has averaged over the past five years. Based on the historical trend, the shares appear to be oversold.
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Fool contributor Andrew Walker has no position in any stocks mentioned.