Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) recently hit a valuation of $100 billion, and investors who have historically overlooked the bank are wondering if the time has come to add the stock to their portfolios.
Let’s take a look at the current situation to see if Bank of Nova Scotia should be on your buy list.
International operations
Bank of Nova Scotia is Canada’s most international bank, with the majority of the investment in recent years targeted at Mexico, Peru, Colombia, and Chile.
Why?
These four countries form 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.
Bank of Nova Scotia has a strong presence in each market, so it is positioned well to benefit, as companies entering new countries require additional cash-management services.
On the retail side, Bank of Nova Scotia is targeting a Pacific Alliance market of more than 200 million consumers. With the middle class expanding, the bank should see strong demand growth for loans and investment products.
The international division already accounts for close to 30% of Bank of Nova Scotia’s earnings, and that could grow in the coming years.
Risks
Some investors are concerned a downturn in the Canadian housing market will hammer the big banks. It’s true that a total meltdown would be negative, but most analysts predict a gradual pullback in prices.
Bank of Nova Scotia’s Canadian residential mortgage portfolio is capable of riding out a rough patch. Insured mortgages represent about half of the loans and the loan-to-value ratio on the uninsured mortgages is 50%.
This means house prices would have to fall significantly before Bank of Nova Scotia took a material hit.
Dividends
The bank has a strong track record of dividend growth, and that trend should continue.
At the time of writing, the payout provides a yield of 3.8%.
Should you buy?
Bank of Nova Scotia’s international operations provide a nice hedge against a potential downturn in Canada, and offer stronger growth prospects due to the lower banking penetration in the emerging markets.
At 13 times trailing earnings, the stock is not as cheap as it was early last year, but is still trading at a lower multiple than its larger Big Five peers.
If you like the growth prospects in Latin America and want to add a bank stock to the portfolio, Bank of Nova Scotia deserves to be on your radar.
