Bank of Nova Scotia (TSX:BNS)(NYSE:BNS), Canada’s third-largest bank in terms of total assets, announced better-than-expected second-quarter earnings results before the market opened on May 31, but its stock has reacted by making a slight move lower. Let’s break down the results and the fundamentals of its stock to determine if this weakness represents a long-term buying opportunity or if it could continue lower from here.
Breaking down the earnings beat
Here’s a summary of Bank of Nova Scotia’s second-quarter earnings results compared with what analysts had expected and its results in the same period a year ago.
| Metric | Q2 2016 Actual | Q2 2016 Expected | Q2 2015 Actual |
| Earnings Per Diluted Share | $1.46 | $1.42 | $1.42 |
| Total Revenue (TEB) | $6.65 billion | $6.44 billion | $6.05 billion |
Source: Financial Times
Bank of Nova Scotia’s earnings per diluted share increased 2.8% and its total revenue on a taxable equivalent basis (TEB) increased 9.8% compared with the second quarter of fiscal 2015.
Its slight earnings-per-share growth can be attributed to its adjusted net income increasing 3.6% to $1.86 billion, driven by 17.9% growth to $977 million in its Canadian Banking segment and 15.2% growth to $561 million in its International Banking segment.
Its very strong revenue growth can be attributed to its net interest income (TEB) increasing 10% to $3.52 billion, driven by 15.2% growth to $1.59 billion in its International Banking segment, and its non-interest income (TEB) increasing 9.6% to $3.13 billion, driven by its total banking revenues increasing 11.4% to $1.03 billion.
Here’s a quick breakdown of eight other notable statistics from the report compared with the year-ago period:
- Total assets increased 6.9% to $894.96 billion
- Deposits increased 5.9% to $609.31 billion
- Loans increased 7.1% to $466.85 billion
- Common shareholders’ equity increased 4.8% to $48.95 billion
- Assets under administration increased 1.7% to $453.47 billion
- Assets under management increased 1.5% to $179.41 billion
- Book value per common share increased 5.4% to $40.70
- Productivity ratio on a taxable equivalent basis improved 410 basis points to 57.4%
Bank of Nova Scotia also announced that it would be maintaining its quarterly dividend of $0.72 per share, and the next payment will come on July 5 to shareholders of record at the close of business on July 27.
What should you do with Bank of Nova Scotia stock today?
It was a solid quarter overall for Bank of Nova Scotia, and its results exceeded expectations, so I think the market should have reacted by sending its stock higher. With this being said, I think the decline in its stock represents a great buying opportunity for the long term for two reasons in particular.
First, it’s a value play. Bank of Nova Scotia’s stock trades at just 11.1 times fiscal 2016’s estimated earnings per share of $5.81 and only 10.5 times fiscal 2017’s estimated earnings per share of $6.17, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 11.5 and the industry average multiple of 13.7. It also trades at a mere 1.59 times its book value per share of $40.70, which is a discount compared with its five-year average market-to-book value of 1.85.
Second, it’s a dividend play. Bank of Nova Scotia pays an annual dividend of $2.88 per share, which gives its stock a very high and very safe yield of about 4.5%. It’s also very important to note that it has raised its annual dividend payment for five consecutive years, and its three hikes since the start of 2015, including its 2.9% hike in March, have it on pace for 2016 to mark the sixth consecutive year with an increase.
With all of the information provided above in mind, I think Bank of Nova Scotia is a strong buy. All Foolish investors who do not have exposure to the banking industry should strongly consider initiating positions today.
