Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is back to where it started 2017, and investors are wondering if the pullback is an opportunity to pick up the stock.
Let’s take a look at Canada’s third-largest bank to see if it should be in your portfolio today.
International operations
Fans of the stock like Bank of Nova Scotia’s significant presence in foreign markets, as it provides a nice hedge against a downturn in the Canadian economy.
The company has spent billions to build a solid international operation with the largest focus on Latin America. Specifically, Bank of Nova Scotia is targeting growth opportunities in Colombia, Mexico, Peru, and Chile.
Why choose these markets?
The four countries represent the core of the Pacific Alliance, which is a trade bloc set up to enable the free movement of goods and capital among the member states.
Combined, the countries offer a market of roughly 200 million consumers that are underbanked compared to Canada.
As trade grows and the middle class expands, Bank of Nova Scotia is positioned well to capitalize on demand for cash management services, credit cards, loans, and investment products.
Fiscal Q1 results came in quite strong from the international group, delivering net income of $576 million, representing a 14% jump over the same period last year.
Overall net income in the quarter was $2 billion, so you can see how significant the international operations are for the bank.
Risks
Concerns over Canada’s housing market and rising personal debt levels continue to bubble on the sidelines, and that might be part of the reason for the pullback in recent weeks.
Bank of Nova Scotia finished fiscal Q1 with $195 billion in Canadian residential mortgages. Insured loans represent 56% of the portfolio, and the loan-to-value ratio on the uninsured component is 51%.
This means house prices would have to pull back significantly before the bank sees any material hit.
Dividends
Bank of Nova Scotia has a strong track record of dividend growth. The current payout provides a yield of 4%.
Should you buy?
As a buy-and-hold pick to stick in your RRSP for the next two decades, Bank of Nova Scotia should be an attractive pick, but I wouldn’t back up the truck just yet.
The recent pullback definitely makes the stock more appealing than it was in the middle of February, but Bank of Nova Scotia is still up more than 40% from the lows we saw early last year.
The stock was arguably oversold at that point, but there might be more downside in the near term if investors get serious about locking in some gains in the financial sector.
If you already own the stock, I would hold the position, but new investors might see a better entry point in the near term.
