While investing in emerging markets is far riskier than doing so in developed economies, it also provides investors with a range of benefits. Key is the ability to reduce investment risk by further diversifying their portfolio while gaining access to outsized returns. An attractive region for many Canadian investors is Latin America, which is on the cusp of a new stage of growth. There is a wide range of possibilities for investors to boost their exposure to the region without leaving the comfort and security of Canada.
However, it is important to be aware of the wide range of hazards associated with investing in Latin America. These include resource nationalism, weak legal systems, heavy-handed bureaucracies, and opaque regulatory frameworks. Many of those arise from fragile states, unstable governments, significant economic inequality, and structural weaknesses that lead to systemic corruption and abuses of power.
While that certainly magnifies the risk associated with any investment in Latin America, considerable opportunities exist because many regional nations are experiencing rapid rates of economic growth and development. One Canadian company that has shown itself adept at operating in Latin America and capable of successfully navigating the Byzantine legal and regulatory environment that exist in many regional countries is Bank of Nova Scotia (TSX:BNS)(NYSE:BNS).
Developed a significant regional presence
Through a series of accretive acquisitions Scotiabank has established a major banking franchise across Latin America to become Mexico’s seventh-largest bank, the fifth largest in Colombia, as well as the third-largest privately owned financial institution in Peru and Chile. That significant regional expansion — along with the economies of those nations returning to growth — has seen net income from its international division soar.
For the third quarter 2018, adjusted net income shot up by 15% year over year to $784 million, which is a whopping 72% higher than the equivalent quarter four years earlier. This now sees Scotiabank’s international business contributing 40% of its bank-wide net income compared to 32% for the same period in 2017 and 19% for the third quarter 2014. This indicates just how important a growth driver its investment in Latin America has become.
In fact, this considerable exposure to Latin America significantly bolsters Scotiabank’s growth prospects by reducing its dependence on a heavily regulated and saturated Canadian financial services market. It also sees the bank operating in economies that are growing at a far greater rate than Canada.
According to data from the International Monetary Fund, Mexico’s 2018 gross domestic product will increase by 2.2%, whereas for Colombia it expected to grow by 2.8%; for Peru and Chile it will expand by an impressive 4%. Those forecasts, in almost all cases, are significantly higher than the 2.1% predicted for Canada. This — in conjunction with those nations being underbanked and possessing young, rapidly expanding populations — underscores the considerable growth potential that exists.
The net interest margin (NIM) — a key measure of profitability for a bank — that Scotiabank can garner in those countries is also significantly greater than in Canada because of higher official interest rates. For the third quarter, international banking announced a NIM of 4.7%, which was almost double the 2.46% reported for its Canadian banking division.
Why invest in Scotiabank?
Scotiabank presents investors with opportunity to gain exposure to some of the fastest-growing developing economies globally without leaving the safety of Canada. A marked uptick in economic growth in Latin America coupled with the bank’s initiatives aimed at expanding its regional business, while reducing costs should see earnings grow at a solid clip in coming months. While investors wait for that to translate into a higher market value, they will be rewarded by Scotiabank’s sustainable dividend, which yields a juicy 4.6%.
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Fool contributor Matt Smith has no position in any stocks mentioned.