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Bank of Nova Scotia Stock: Has the Price Drop Gone Too Far?

The pullback in the market is giving investors a chance to pick up some of Canada’s top companies at reasonable prices.

Let’s take a look at Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) to see if it deserves to be on your buy list today.

Earnings

Bank of Nova Scotia reported solid results for fiscal 2017, generating net income of $8.2 billion. All three of the core segments delivered gains compared to the previous year.

The Canadian banking operations enjoyed healthy loan growth, and year-over-year net income in the group rose 9%.

The international banking group also performed well, with net income up 15%, supported by strong loan and deposit growth. Bank of Nova Scotia has invested heavily in building a large international presence, with a core focus on Pacific Alliance members Mexico, Peru, Chile, and Colombia. As the middle class grows in the region, Bank of Nova Scotia should benefit from rising demand for loans and investment products. Overall, the international operations contribute about 30% of the bank’s net income.

Finally, Bank of Nova Scotia’s global banking division, which contains the investment banking and trading operations, saw net income increase 16% compared to 2016.

Growth

Bank of Nova Scotia continues to make strategic acquisitions at home and abroad. The company recently announced a deal to buy Montreal-based wealth and portfolio manager Jarislowsy Fraser for $950 million.

In addition, Bank of Nova Scotia is working through its $2.9 billion purchase of a majority stake in BBVA Chile. The deal doubles Bank of Nova Scotia’s market share in Chile to 14%, making the the Canadian lender the third-largest private sector bank in the South American country.

Risks

Rising interest rates could put a pinch on family finances in Canada, and some investors are concerned a downturn in the housing market could hit the banks. It’s true that a wave of defaults could push home prices lower, but Bank of Nova Scotia is capable of riding out a pullback.

The company finished fiscal 2017 with $206 billion in Canadian residential mortgages, of which 49% is insured and the loan-to-value ratio on the other half is 51%. This means home prices would have to fall significantly before Bank of Nova Scotia had a material hit.

Dividends

Bank of Nova Scotia has a strong track record of dividend growth, and that should continue in line with expected earnings-per-share growth of 5-10% over the medium term. At the time of writing, the stock provides a yield of 4.3%.

Should you buy?

The stock is down from $85 per share in November to $76.50. That puts the trailing 12-month price-to-earnings ratio at 11.25, which is starting to look attractive when compared to the two larger Canadian banks.

Bank of Nova Scotia’s international operations provide a nice hedge against a potential downturn in the Canadian economy, and the long-term potential for Latin America makes the bank an interesting buy-and-hold pick to play emerging market growth.

If you have some cash sitting on the sidelines, I would consider adding Bank of Nova Scotia to your portfolio today. The pullback is starting to look overdone.

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Fool contributor Andrew Walker has no position in any stock mentioned.

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