Let’s take a look at the current situation to see if Canada’s third-largest bank deserves to be in your portfolio.
Bank of Nova Scotia just reported strong results for fiscal Q3 2016. The company generated net income of $1.96 billion–up 6% compared with the same period last year.
Canadian banking net income rose 8% to $930 million. The company spent more money on technology and internal investments in the quarter, but this was offset by benefits realized from cost cuts in other areas of the business.
Bank of Nova Scotia is Canada’s most international bank. The foreign operations are primarily focused on Latin America, with Mexico, Colombia, Peru, and Chile being the main markets.
These countries form the core of the Pacific Alliance–a trade bloc set up to promote the free movement of goods and capital among the member states.
After a wave of acquisitions to build scale, Bank of Nova Scotia is focusing on making the international operations more efficient, and recent restructuring efforts are starting to have a positive impact.
International banking activities generated fiscal Q3 net income of $527 million–up 9% year over year. The company is seeing strong loan, deposit, and fee growth. Loans jumped 9% and deposits rose 15% compared with 2015.
Bank of Nova Scotia’s global banking and markets group added net income of $421 million–up 12% compared with last year. Investment banking, corporate banking, and precious metals activities all delivered solid results.
Overall, the bank had a strong quarter in a challenging market.
Investors are concerned the oil rout and a possible housing bubble are destined to hammer the Canadian banks.
Bank of Nova Scotia has higher exposure to the energy sector than its larger peers. The company had drawn oil and gas loans of $16.1 billion at the end of Q3 with 52% of the portfolio rated as investment grade. Undrawn commitments add an additional $11.9 billion of exposure to the segment.
Oil companies have benefited from a rise in prices in recent months, and that has removed some of the risk, but investors will have to keep an eye on the energy portfolio for signs of trouble if oil decides to retest its 2016 lows.
Regarding housing, Bank of Nova Scotia has $191 billion in Canadian residential mortgages on the books. Insured loans represent 59% of the portfolio and the loan-to-value ratio on the rest is 50%. This means the housing market would have to crash significantly before the bank takes a material hit.
Bank of Nova Scotia just raised its dividend to $0.74 per share. That’s good for a yield of 4.2%. The company has a strong track record of dividend growth, and investors should see the trend continue.
Should you buy?
The stock is not as cheap as it was earlier this year, but Bank of Nova Scotia is still an attractive pick for buy-and-hold investors.
The international revenue stream should help offset difficult times in Canada, and you get a very safe dividend that offers great yield, even after the big rally in the stock.