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This Bank Stock May Be the Most Vulnerable to a U.S.-China Trade War

Ambrose O'Callaghan
Financial technology concept.

Scotiabank (TSX:BNS)(NYSE:BNS) stock had fallen 2.1% week-over-week as of close on May 14. Worsening trade relations between the world’s two largest economies – the United States and China – have led to a return to volatility in global markets. A full-blown trade war between the two nations would have far-reaching consequences, with some banks and companies suffering more than others.

Scotiabank is set to release its second-quarter results for 2019 before markets open on May 28. It has often been referred to as the international bank because of its large global footprint. China was expected to contribute roughly 27% of GDP growth to the global economy in 2018 and 2019. India is the second-largest contributor at 12.9% according to International Monetary Fund (IMF) projections in late 2018.

Scotiabank reported a 17% year-over-year increase in net income in its international banking segment in the first quarter of 2019. Adjusted profit jumped 19% to $805 million. This growth was driven by higher net interest income and strong loan and deposit growth in Pacific Alliance countries. Scotiabank has cultivated its interests in South America and its growth hinges on continued development in the region.

According to a late 2018 United Nations Conference on Trade and Development (UNCTD) report, China has grown into the second largest foreign investor worldwide. Its foray into Africa has been widely reported, but it has also pushed to establish a large presence in South America. China has expanded its footprint in Chile, Peru, and to a lesser extent Colombia in recent years. Chile and Peru are the only South American countries that form part of the Chinese Free Trade Agreements (FTA) network.

Brazil, which lacks an FTA with China, has still seen a $7 billion rise in Chinese investment from 2015 to 2017, which has been driven by deals involving the Chinese state-owned power company China Three Gorges Corporation.

The souring trade relationship between the U.S. and China has also complicated Canada’s position. Canada-China relations took a southward turn after the arrest of Huawei executive Meng Wanzhou in December 2018. Canada has worked to develop a positive trade relationship with China, but its entrance into the new USMCA solidified its position in a hardened North American trade bloc. Investors should expect Canada to stand shoulder-to-shoulder with the US going forward, which may lead to cooler relations with China in the long term.

A prolonged trade war has the potential to impact these threads across the Americas. There is no immediate threat to Scotiabank as it stands today. However, its reliance on emerging markets growth, particularly in Pacific Alliance countries, could make it vulnerable to a tit-for-tat trade war between the U.S. and China. After the initial tariff increase was announced, Scotiabank analysts forecast that continued escalation would eventually make its way to hurt North American consumers.

Macroeconomic concerns aside, Scotiabank boasts solid value heading into its next earnings release. Its forward P/E sits at 9.9 which puts it in a favourable price range relative to its peers. Scotiabank stock also boasts a 4.8% dividend yield, which is one of the best among the top bank stocks.

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Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned. Scotiabank is a recommendation of Stock Advisor Canada.

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