Low yields from traditional fixed interest investments, such as bonds, has triggered a hunt for yield among investors. This has sparked a surge in the popularity of dividend-paying stocks, particularly those that have a long history of regular dividend hikes. One sector that has been especially attractive for income-hungry investors over the last decade has been Canada’s major banks. Despite claims that domestic banks are on the brink of suffering large losses because of a normalization of the credit cycle, which will have a sharp impact on their market value, they remain attractive investments.
While it may be the ninth most shorted stock on the TSX, Bank of Nova Scotia (TSX: BNS)(NYSE: BNS), also known as Scotiabank, is an attractive investment for those investors seeking a combination of income and growth. Scotiabank has only gained 4% since the start of the year, trailing behind its Big Five peers, creating an attractive entry point.
Strong growth prospects
What makes the bank especially appealing is that it is Canada’s most international bank, having invested significant capital in expanding its operational footprint in Latin America through a series of acquisitions. This means that unlike more domestically focused banks such as Canadian Imperial Bank of Commerce and Royal Bank of Canada, it possesses far greater growth potential.
Scotiabank generates around 40% of its net income from its international banking division, which has experienced substantial growth over the last decade; it is ranked as a top-10 bank in Mexico, Colombia, Chile, and Peru. Those economies have returned to growth, and, according to data from the International Monetary Fund (IMF), will expand at a greater rate than Canada. The IMF anticipates that Colombia’s GDP will grow by 3.5% year over year, whereas Chile’s will expand by 3.4% and Peru’s will expand by an impressive 3.9% compared to Canada’s modest 1.5%.
Such strong growth bodes well for a sharp uptick in demand for credit, as business and consumer confidence in Latin America improves.
Scotiabank’s considerable investment in the region over recent years is already paying off. First-quarter 2019 adjusted net income from international banking expanded by a very healthy 26% compared to the same period in 2018 to $921 million, although the bank’s group-wide bottom line fell by 4% to $2.2 billion.
A key driver of the notable improvement in the performance of international banking was a 44% increase in loans for its operations in Mexico, Colombia, Chile, and Peru, which gave revenue from those countries a notable 31% increase. A combination of stronger economic growth coupled with a rapidly expanding middle class and those countries being underbanked will drive further earnings growth.
The primary reason for the decline in Scotiabank’s overall net income was a marked 26% year-over-year drop in net income from its global banking and markets business.
This was caused by a 12% decrease in non-interest income due to lower trading activity, which occurred because of higher market volatility and fears that the global economy was slowing.
Along with the solid growth expected in Latin America, the Canadian economy has been far more upbeat than the IMF anticipated. That bodes well for stronger loan and deposit growth for Scotiabank’s domestic operations, which will give its bottom line a healthy boost.
Putting it together for investors
Strong earnings growth will give Scotiabank’s stock a boost and support the sustainability of its dividend, which, after being hiked for the last eight years straight, yields almost 5%. The bank’s dividend has a conservative payout ratio of 50%, underscoring that it is sustainable and there is plenty of room for further dividend increases. For these reasons, Scotiabank is an ideal stock for investors seeking growth, exposure to emerging market, and a regularly growing passive-income stream.
