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Is This Bank Canada’s Top Dividend Growth Stock?

Fears of a global slowdown, the impact of weaker oil on Canada’s economy, a slowing housing market and a saturated financial services sector have all been weighing on the outlook for Canada’s banks. There are worries that growth opportunities for the major banks are limited and that they will be unable to deliver the robust growth reported over the last decade since the global financial crisis. However, those concerns shouldn’t deter investors from buying Canada’s third largest bank by assets Bank of Nova Scotia (TSX:BNS)(NYSE:BNS), which trades as Scotiabank.

Solid international presence

Unlike many of its peers, Scotiabank chose to invest in establishing a sizable offshore presence in rapidly growing emerging markets in Latin America. Through a series of acquisitions, the latest being the purchase of the fourth-largest lender in the Dominican Republic Banco Dominicano del Progreso, Scotiabank has built a significant regional presence over the last decade.

While that strategy once sparked concern among industry analysts because of Latin America’s long history of economic and political instability, it has provided Scotiabank with considerable opportunity. The strategy has seen it emerge as a top 10 bank in Mexico, the fifth largest in Colombia, Peru’s third largest and be ranked by assets as Chile’s third largest privately-owned bank. By the end of 2018, Scotiabank’s international business was responsible for almost 32% of its reported net income compared to around 29% eight years earlier.

Latin America is proving to be an earnings powerhouse for the bank that’s more than capable of offsetting any diminished growth opportunities in Canada. Firmer commodity prices have seen many of the region’s major economies, especially Chile and Peru, return to growth. For 2019, the International Monetary Fund (IMF) expects Chile’s gross domestic production to expand by 3.4%. while Peru’s will grow by 4.1%. This bodes well for greater demand for mortgages, business loans and consumer credit that will buoy net interest income and hence earnings for Scotiabank.

This business is also potentially more profitable for the bank than its Canadian operations. This is because of higher headline interest rates in the region that saw Scotiabank’s international division report a 2018 net interest margin of 4.65%, almost double the 2.44% reported by its Canadian business. The profitability of the bank’s international segment will continue to grow as central banks across Latin America respond to firmer economic growth by hiking official interest rates and Scotiabank focuses on reducing operating expenses.

That last point is particularly important to note because Scotiabank’s international business reported a 2018 productivity ratio of 53.5% compared to 49.8% for Canada, highlighting that its domestic business was more efficient at generating revenue. As Scotiabank cuts costs and streamlines its operations in Latin America, that ratio will fall, thereby indicating that profitability is rising.

Growing wealth, a rapidly expanding middle class and young population combined with many countries in Latin America being heavily underbanked provides Scotiabank with immense opportunity. This is further enhanced by its latest deal to acquire Banco Dominicano del Progreso, which will double Scotiabank’s customer base in the Dominican Republic to 500,000 and make it the country’s fourth largest lender.

The Dominican Republic has been experiencing an economic renaissance in recent years, as is evidenced by 2018 GDP increasing by an impressive 6.4%. While it is anticipated that economic growth will ease during 2019, the nation’s GDP will still expand by a very respectable 5%. This will drive greater demand for credit, especially from businesses as the Dominican Republic’s tourism boom further fuels a flourishing residential property boom.

Why Scotiabank?

Poor domestic growth prospects in a saturated domestic mortgage market weighed down by a slowing property sector and weaker than expected economy are weighing on the outlook for Canada’s banks. Scotiabank’s decision to aggressively expand its Latin American business provides it with the opportunity to side-step much of the anticipated domestic fallout because that region offers substantial opportunities for it to expand its business and grow earnings. This, along with Scotiabank’s sustainable regularly growing dividend yielding a juicy 4.5% makes it a must have core holding for every portfolio.

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Fool contributor Matt Smith has no position in any of the stocks mentioned. Bank of Nova Scotia is a recommendation of Stock Advisor Canada.

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