Bank of Nova Scotia $45 – Toronto symbol BNS

BANK OF NOVA SCOTIA $45 (Toronto symbol BNS; Conservative Growth Portfolio, Finance sector; SI Rating: Above average) is Canada’s third-largest bank, with total assets of $325.0 billion.

The bank has the highest international exposure of the big five Canadian banks, and now gets nearly 30% of its revenue and income from overseas assets. Bank of Nova Scotia prefers to invest in developing areas like the Caribbean and Latin America, where spreading prosperity is fueling demand for banking services. It has few operations in the United States.

For example, Bank of Nova Scotia just agreed to pay an undisclosed sum for Citigroup Inc.’s retail banking business in the Dominican Republic. The purchase will make it that country’s fifth-largest bank, and enhances its credit card and consumer loan operations.

This wide geographic base is paying off. In the three months ended January 31, 2006, earnings grew 9.1%, to a record $0.84 a share (total $852 million) from $0.77 a share ($788 million) a year earlier. That gives it plenty of cash for stock buybacks, or dividend increases; the current annual dividend rate of $1.44 a share yields 3.2%.

Bank of Nova Scotia is still the most efficient of the five banks. Its productivity ratio (non-interest operating expenses divided by revenue — the lower, the better) fell to 55.2% in the most recent quarter from 55.7% a year earlier.

The stock now trades at 13.2 times its likely fiscal 2006 profit of $3.41 a share. That’s low considering the growing profit potential of its international operations.

Bank of Nova Scotia is a buy, and our top choice for new bank investment.

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