A few days ago, I wrote about how I was planning on selling The Toronto Dominion Bank (TSX: TD) stock, which recently went on a massive and fast bull run, rising about 140% in 1.5 years (with dividend re-investment). I also wrote that I was in the process of selling the stock, because I felt it had likely risen about as far as it was going to.
Since my article appeared, TD stock has basically remained flat, hovering around the $170 range. As a result, I have not sold any further TD stock since that article published (my goal was to do another sale either at $175 or whenever I found a better opportunity, whichever came first).
Well, TD has not hit $175 yet, and I’m still not 100% sure about HSBC, the main company I’d been thinking of replacing it with. But recently I started thinking about another Canadian bank, that resembles TD in many ways–one that largely hasn’t joined the party in Canadian banking that has taken place over the last year and a half–and I think it might just have room to run.
Source: Getty Images
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) has historically been one of Canada’s less well-performing banks. Over the last 10 years, BNS has risen only 67%, compared to 170% for TD and 232% for Royal Bank of Canada. It has been a period of marked underperformance for one of Canada’s oldest financial institutions.
As for why BNS has underperformed:
Unlike other Canadian banks that expanded mainly into the U.S., BNS expanded into Latin America (LATAM), and that region has seen significant economic and geopolitical volatility in the period in which BNS has been operating there. Corruption and political coups were occasionally part of the problems there, but the main issue was that many Latin American currencies depreciated against the Canadian dollar while BNS was operating in LATAM. This caused the Canadian-dollar-denominated earnings to decline.
Latin America improving
Flash forward to today. There are many signs of improvement in institutions in Latin America, including:
- Improving law enforcement in several countries.
- Lessening corruption.
- A manufacturing boom brought on largely by partnership with China.
These and other indicators suggest that Latin America is becoming more economically robust. And there is evidence for it in Bank of Nova Scotia’s recent earnings!
Bank of Nova Scotia: Recent performance
In the last 12 months (LTM) Bank of Nova Scotia has delivered one of the best performances of all large cap Canadian banks. In the period, it has delivered:
- $22 billion in revenue, up 17%.
- $7 billion in net income, up 43.8%.
- $5.36 in earnings per share, up 52%.
Obviously, extremely good results. Now, when you pull back a bit, you see that the long-term averages are not as good: over the last 10 years, BNS’s earnings are only up 5% and 3.7% annualized, trailing TD and RY, respectively. Those numbers aren’t great. But note the improving the state of Latin America’s economy. There are possibly some thesis-changing developments underway here.
