The typical bank offers a dividend yield of approximately 2.5%, as represented by the SPDR S&P Bank ETF (NYSEMKT: KBE). But what if you could invest in a bank delivering a yield of 6.1%? Imagine if this bank was managed conservatively, had a robust core business, and consistently paid dividends. You’d likely seize the opportunity to own such a high-yield bank. Fortunately, you can invest in Bank of Nova Scotia (-0.26%). Here’s why now is an ideal time to make that investment.
Why Does Bank of Nova Scotia Offer Such a High Yield?
Bank of Nova Scotia, better known as Scotiabank, has not kept pace with other banks. A significant reason for this is its unique strategic direction, differing from its Canadian counterparts. While most major Canadian banks expanded into the U.S. market, Scotiabank chose to develop its business in Central and South America instead.
The reasoning behind this decision is sound, considering that the U.S. is a highly competitive and mature market. In contrast, the markets Scotiabank targeted were still developing and less competitive, presenting the possibility for long-term growth. Although this potential remains, these emerging markets have not proven to be as profitable as anticipated. As a result, Scotiabank has underperformed its peers in critical areas like earnings growth, return on equity, and return on risk-adjusted assets.
Despite being one of Canada’s largest banks, bolstered by stringent Canadian banking regulations, Scotiabank offers a dividend yield of 6.1%, more than double the average bank’s yield. The bank has consistently paid dividends since 1833, maintains a generally conservative approach characteristic of Canadian banks, and possesses an investment-grade-rated balance sheet. Indeed, the risk associated with this high-yield return appears relatively low.
How Is Scotiabank Addressing Its Underperformance?
Naturally, investors are concerned about Scotiabank’s lackluster performance compared to its peers. However, management is actively tackling the issue and charting a new course. The bank is withdrawing from weaker markets, such as Colombia, and channeling more resources into expanding in more promising areas like Mexico. Additionally, it is increasing its presence in the United States, aligning with its peers.
This last move is crucial to Scotiabank’s strategy, as it aims to establish a dominant North American bank spanning Mexico, Canada, and the United States. This would enable the bank to serve a regional trading bloc with a geographically integrated offering. Scotiabank has made a significant move in this direction.
Rather than building a business from scratch, Scotiabank has agreed to acquire nearly 15% of KeyCorp (-3.33%). This acquisition, occurring through two transactions, is expected to be immediately beneficial to Scotiabank’s earnings. It also provides financial support to KeyCorp, which needed to strengthen its finances. Essentially, this is a mutually beneficial arrangement, with long-term advantages likely to emerge.
Currently, Scotiabank’s stake is merely an investment in another bank. However, there is potential for collaboration between Scotiabank and KeyCorp to offer joint products and services. Notably, KeyCorp is more consumer-focused, while Scotiabank concentrates on business clients, meaning they won’t compete directly. Any partnership would enhance each bank’s operations.
The agreement includes a five-year standstill clause, limiting immediate actions. Nonetheless, it’s conceivable that Scotiabank might consider acquiring KeyCorp in the future, which would instantly boost its presence in the U.S. market.
Scotiabank’s Future Could Be Radically Different
Investors should be cautious not to overinterpret Scotiabank’s recent investment. However, it signifies a decisive shift in strategy as management aims to close the performance gap with competitors. This will be a long-term endeavor, no doubt. Yet, with such a determined initial push from a financially robust, high-yield bank, investors with a long-term perspective might want to consider investing now. If Scotiabank successfully enhances its performance, that attractive dividend yield might not be available for long.
