Canadians are searching for top stocks to hold in their TFSA accounts.
A focus on Latin America
Bank of Nova Scotia is Canada’s most international bank with full-service operations in more than 30 countries.
Latin America has received most of the investment attention in recent years. Mexico, Colombia, Peru, and Chile are the top markets; these countries form the core of the Pacific Alliance, a trade bloc set up to enable the free movement of goods and capital.
As the middle class expands in this combined market of more than 200 million consumers, demand for banking products should grow, and Bank of Nova Scotia is positioned well to benefit.
Bank of Nova Scotia generated fiscal Q2 net income of $1.86 billion, up 4% from the same period last year.
Canadian banking continues to perform well despite the headwinds facing the sector. Adjusted net income rose 6% compared with Q2 2015. Loans rose 3% and deposits increased by 7%.
International banking saw net income rise 12% year over year with loans up 13% and deposits rising 19% in the quarter.
Overall, the bank is delivering strong results.
Market observers are concerned the oil rout and an overheated housing situation could start to bite the Canadian banks.
Bank of Nova Scotia finished fiscal Q2 2016 with $16.3 billion in drawn energy exposure, half of which is rated as investment grade. Undrawn oil and gas commitments were $11.4 billion.
The oil sector appears to be on the mend, and most of the banks say the worst is probably over regarding charges for bad loans. Bank of Nova Scotia’s energy exposure is higher than its larger peers, but the risks remain manageable.
On the housing front, Bank of Nova Scotia finished Q2 2016 with $189 billion in Canadian residential mortgages. Insured loans make up 63% of the portfolio, and the loan-to-value ratio on the remainder is 51%. This means house prices would have to crash significantly before the bank takes a material hit.
Bank of Nova Scotia pays a quarterly dividend of $0.72 per share. That’s good for a yield of 4.3%.
Should you buy?
The international operations provide investors with a nice hedge against weakness in the Canadian economy, and revenue from the Latin American business should continue to rise.
The stock isn’t as cheap as it was earlier this year, so I wouldn’t expect much price growth in the near term, but the dividend is attractive and buy-and-hold investors should do well over the long term. As such, I think Bank of Nova Scotia remains a solid TFSA pick.