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Despite all the negativity in the press about Bank of Nova Scotia (TSX:BNS)(NYSE:BNS), it is my belief that Bank of Nova Scotia is one of the best banks that an investor can hold. While it does have some of its money tied up in bad oil loans, the reality is the company has set itself up to do really well over the coming years due to its international exposure. And along the way, investors are easily making over 4% in yield.
But let’s break down the reasons that buying Bank of Nova Scotia is a good move for investors.
Bad loans are an overblown concern
As stated above, one issue is the oil problem. Investors and analysts are looking at the $16 billion in loans that the company has with oil companies and they get nervous about overexposure. The reality is that this $16 billion is only 3% of the total outstanding loans. And what’s even better for the company, less than 2% of its problematic loans are oil loans.
And the same can be said for mortgages. Like most banks, nearly 50% of Bank of Nova Scotia’s loans are mortgages. And 80% of those are in Canada. When the times were good, this was generating a lot of money for the company. However, if the housing market cools, it could have an impact on Bank of Nova Scotia. However, the reality is this will happen to every bank because they are too overexposed to Canadian housing.
Bank of Nova Scotia is international
Unlike the other firms, though, Bank of Nova Scotia is diversified in its international markets. Therefore, if the Canadian housing market cools too much, it’ll still be able to generate revenue and profits from its Latin American holdings. It has operations in over 50 countries worldwide, with a heavy focus in Mexico, Peru, Chile, Colombia, etc.
And these countries are starting to pay off. Its commercial loan growth grew 11% in Q1 2015 year over year. And its residential loan growth grew by 13% year over year. As more lending takes place, the bank will continue to grow. But here’s the thing that is important to understand: Mexico is four times the size of Canada. Therefore, Bank of Nova Scotia is in a very lucrative position to profit handsomely as Latin America continues to grow.
It pays its investors
I am a big fan of companies that pay investors dividends. Investors are part owners and if there are profits, they deserve to get some of that money. Bank of Nova Scotia agrees with this statement and pays investors a lucrative 4.08% yield, which comes out to $2.72 a share per year. And as the company continues to do well, it intends to increase that dividend further, so investors can reap the benefits.
Now what?
I believe investors would be smart to buy Bank of Nova Scotia. It is one of my favourite Canadian banks due to its international exposure and the fact that it pays such a generous dividend. While many banks should be concerned about a cooling Canadian housing market, Bank of Nova Scotia has assets in other parts of the world that will help support it in any downturn.
