TFSA Wealth: Is This a Good Time to Buy Bank of Nova Scotia (TSX:BNS) Stock?

Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is an interesting stock for buy-and-hold investors. Here’s why.

| More on:
hand using ATM

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn moresdf

Canadian investors are searching for top-quality stocks to add to their self-directed TFSA portfolios.

The country’s bank stocks are regularly recommended as being strong anchor picks for a diversified fund, but opinions differ on which bank should be the top pick.

Let’s take a look at Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) to see if it deserves to be on your buy list today.

Earnings

Scotiabank just reported results for fiscal year 2019, which ended October 31. The bank generated adjusted net income of $9.4 billion, representing a 3% increase over 2018. Adjusted revenue rose 8% and adjusted expenses jumped 10%.

The hike in costs is partly due to spending associated with the acquisition and integration of two wealth management companies in Canada and a major purchase in Chile. In addition, spending on technology increased as the bank invests to improve its digital banking operations.

Canadian banking adjusted net income rose 2%, while the international businesses saw a 13% rise.

Scotiabank has invested billions of dollars on foreign acquisitions in recent years, with the bulk of the action occurring in Mexico, Peru, Chile, and Colombia. The four countries might initially appear to be odd choices for a Canadian bank to target, especially given the volatile political and economic histories.

However, Mexico is part of NAFTA and Canadian oil and mining companies have extensive operations in all of the countries. In addition, the four form the core of the Pacific Alliance trade bloc that is home to 225 million people and represents the ninth largest economy in the world.

The attraction lies in a vast market that allows the fee movement of goods, services, and capital among the member countries. Banking penetration is below 50%.

Scotiabank’s international banking operations generated adjusted net income of $3.2 billion in fiscal 2019. That represents 34% of total profits.

Risk

Recent political turmoil and protests in Chile, Peru, and Colombia are a good reminder that these countries can still be volatile. They depend heavily on natural resources for revenue and changes in commodity markets can have a huge impact on their economies.

With the international operations representing a third of earnings, any major downturn in those countries could have a meaningful impact on Scotiabank’s results.

At home, the Canadian housing market is often flagged as a potential threat to the banks due to high prices and the fact that Canadians are carrying record levels of debt as a percentage of disposable income.

Scotiabank finished fiscal 2019 with $227 billion in Canadian residential mortgage exposure. The uninsured portion represents 61% of the loans and the loan-to-value ratio on that segment is 55%, so things would have to get pretty bad before the bank takes a meaningful hit.

The downward movement in bond yields over the past year has allowed the banks to drop mortgage rates. This has revived the housing market while giving existing homeowners a chance to renew at better rates. The Bank of Canada has also halted interest-rate hikes, which helps borrowers with variable rate loans.

Overall, the risk of a housing meltdown is likely lower than it was 12 to 18 months ago.

Scotiabank has a strong capital position with a common equity Tier 1 ratio of 11.1%, so it should be well positioned to ride out some tough economic times.

Should you buy?

Investors with a buy-and-hold strategy might want to add the stock to their portfolios.

The dividend provides a solid 4.8% yield and shareholders should see the payout grow in line with expected gains in earnings per share of around 5% per year.

The international business is performing well and offers strong long-term growth prospects.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends BANK OF NOVA SCOTIA. Fool contributor Andrew Walker has no position in any stock mentioned.

More on Bank Stocks

Bank sign on traditional europe building facade
Bank Stocks

The 3 Canadian Bank Stocks Worthy of Your TFSA

TD Bank (TSX:TD) and two other Big Six Canadian bank stocks look like great value options for TFSA investors in…

Read more »

think thought consider
Bank Stocks

RBC Stock: Should You Invest in February 2023?

Royal Bank of Canada has delivered stellar returns to investors in the last 20 years. But is RBC stock a…

Read more »

Bank Stocks

I Keep Buying Shares of This Dividend Stock Hand Over Fist

I have been buying shares of Toronto-Dominion Bank (TSX:TD) hand over fist for years.

Read more »

calculate and analyze stock
Bank Stocks

BNS Stock: A Smart Investment Today?

BNS stock has risen 11% in 2023 so far. But is it worth buying today? Let’s find out.

Read more »

edit Businessman using calculator next to laptop
Bank Stocks

Why RBC Stock Is the Most Valuable Stock on the TSX Today

Any investor can have peace of mind their growing wealth long term by owning Royal Bank of Canada (TSX:RY) shares…

Read more »

sad concerned deep in thought
Bank Stocks

Is goeasy the Best Growth Stock to Buy in February 2023?

goeasy stock has lost 15% in the last 12 months but has returned over 250% in the last five years.…

Read more »

Man holding magnifying glass over a document
Bank Stocks

BMO Stock: Is it a Good Investment Today?

Have you considered BMO for your portfolio? Here’s why this big bank may be a good investment for today, tomorrow,…

Read more »

question marks written reminders tickets
Bank Stocks

TD Stock: Is it a Good Investment Today?

TD stock is up more than 6% in 2023. Are more gains on the way?

Read more »