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Why Scotiabank’s (TSX:BNS) Latest Overseas Sale Makes Its Stock a Solid Buy

office buildings
office buildings

It’s been a week of increased assets sales, with Bombardier and Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) announcing key deals. The banker made it official on Wednesday that its assets in Puerto Rico and the U.S. Virgin Islands had gone under the hammer, essentially drawing a line under its drive to slim down its foreign interests.

Scotiabank cut a deal with Oriental Bank, a subsidiary of the Puerto Rican financial services company OFG Bancorp, to take ownership, with the news, causing OFG’s share price to jump significantly. While Scotiabank itself hasn’t budged much on the news, there are clear long-range benefits to the sale that will see the bank better able to profit from its overseas segment and respond to changes in the global market.

Why are investors divided on the sale?

One reason why investors haven’t celebrated the deal is that Scotiabank foresees an after-tax net loss of $300 million to $360 million. There’s a silver lining, though, as the stripped down balance sheet will be cleared of the impaired loans carried by its Puerto Rican assets, giving it a much-needed capital strength injection. Sharp-eyed investors will have noted that the sale marks the end of a four year plan to pull out of 19 nations worldwide.

This latest sale marks the completion of Scotiabank’s reshuffle of its foreign operations. This is a good sign for the stock, as it marks a total change of direction from its acquisition-led model and a move toward integration. Overall, while in the short-term the company will lose out, the streamlined nature of its foreign assets will mean a focused revenue stream and lowered risk.

A strengthening business refocusing on key markets

Scotiabank has done an exemplary job of whittling down its assets to the essentials, making for a leaner, more lightweight bank that will be better able to navigate an uncertain global financial landscape. And although I’m still perturbed by the dip Scotiabank took after its Q2 results, the stock has been climbing steadily back up the hill. While the share price might not reach the early May high of $74, this resilience is reassuring.

Scotiabank’s press release sums it up: “With this transaction – and others which have previously been publicly announced – the repositioning of our international footprint will be substantially complete. Our sharper geographic focus allows us to drive sustainable earnings growth in these key markets, improve earnings quality and the customer experience while reducing risk.”

The overall aim has been to reduce risk and free up a cool $4 billion, which will then be reinvested in the bank’s strongest markets. This focus on redeployment of funds to strengthen Scotiabank in its most lucrative footholds and widen its economic moats in those countries is a good reason to buy and hold this Big Five ticker in a long-term dividend portfolio.

The bottom line

A streamlined bank stripped down to it best-functioning assets is more appealing than a sprawling net of interests with no clear goal. In short, if you’re buying a Canadian banking stock today, Scotiabank is a strong choice with a lot of growth potential.

More reading

Fool contributor Victoria Hetherington has no position in any of the stocks mentioned. Scotiabank is a recommendation of Stock Advisor Canada.

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