Canadians often turn to the banks when searching for stocks to add to their RRSP accounts.
Bank of Nova Scotia is Canada’s most international bank, and management has placed most of its bets on a growing middle class in Latin America.
Over the past several years, the bank has ploughed billions into acquisitions in the region with a core focus on Mexico, Peru, Chile, and Colombia. The four countries represent the heart of the Pacific Alliance, a trade bloc set up to promote the free movement of goods and capital among member states.
The appeal of the region is obvious; the Pacific Alliance countries contain more than 200 million consumers and have banking penetration rates much lower than those seen in more developed economies.
The commercial opportunities are also compelling. When a company moves into a new market it needs a wide variety of cash management products and services. Bank of Nova Scotia is positioned well to help businesses take advantage of the free-trade agreements by having established operations in each of the four Pacific Alliance countries.
Betting on emerging markets comes with risks, but there are also big rewards over the long term when a company gets it right.
Bank of Nova Scotia reported solid fiscal Q3 2016 results.
Net income rose 6% compared with the same period last year with strong performances from both the Canadian and international operations.
Canadian banking net income rose 8% year over year; deposits were up 7% and loan growth came in at 3%. The company spent more on technology than it did in Q3 last year, but that was partially offset by benefits realized through its cost-cutting initiatives.
International banking delivered a 9% gain in year-over-year net income. Loans rose 9% and deposits jumped 15%. Latin America was the strongest region with a 14% rise in loans and a 17% increase in deposits.
Energy and housing exposure
Investors are concerned the energy rout and an overheated housing market could hammer the Canadian banks.
Bank of Nova Scotia is more exposed to oil and gas companies than its larger peers. The company finished Q3 with $16.1 billion in drawn oil and gas loans and an additional $11.9 billion of undrawn exposure.
The energy sector continues to work its way through the downturn, but the consensus among the banks seems to be that the worst is over. As long as oil prices don’t tank again, Bank of Nova Scotia’s energy loans should be manageable.
On the housing side, Bank of Nova Scotia has $191 billion in Canadian residential mortgages. Insured loans make up 59% of the holdings, and the remainder has a loan-to-value ratio of 50%. This means house prices would have to fall significantly before the bank starts to see a material hit.
Bank of Nova Scotia just raised its quarterly dividend to $0.74 per share. That’s good for a yield of 4.2%. The bank has a steady track record of raising the payout, and investors should see the trend continue.
Should you buy?
The international focus makes Bank of Nova Scotia an interesting pick. Growth in Canada is likely to be limited in the coming years, and the Latin American operations should help offset a slowdown in the domestic market.
The stock is not as cheap as it was earlier this year, but investors with a long-term outlook should still do well buying Bank of Nova Scotia at the current price.