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Growth & Income

With the market looking just a little too much like it did in 2008, investors may be leery of bank stocks right now. But don't lump them altogether.

The Canadian banking industry, for instance, is on much more stable footing than the United States banking industry, and one Canadian bank that looks attractive is The Bank of Nova Scotia (BNS - Snapshot Report).

The company has been growing its revenue and earnings, and analysts have been consistently raising their earnings estimates, over the last several months. It is a Zacks #2 Rank (Buy).

Based on consensus estimates, earnings are expected to grow a stellar 23% this year and 8% next year. On top of this growth, the company pays a dividend that yields a hefty 4.2%. Valuation looks attractive too with shares trading at just 10.5x 2011 earnings.

Company Description

The Bank of Nova Scotia, commonly known as Scotiabank, is Canada's third largest and most international bank. It was founded in 1832 and is headquartered in Toronto, Canada.

It has a market cap of $54 billion.

Second Quarter Results

The Bank of Nova Scotia reported its results for the second quarter of 2011 on May 31. Earnings per share came in at $1.12, 2 cents shy of the Zacks Consensus Estimate, due in part to foreign currency effects. It was a 19% increase over the same quarter in 2010, however.

Total revenue was up 16% year-over-year to $4.624 billion, well ahead of the Zacks Consensus Estimate of $4.362 billion. This was driven in part by a 7% increase in net interest income.

The provision for credit losses declined 22% year-over-year as management sees improving credit quality in the near future.

Meanwhile, other income surged 27% due in part to higher wealth management revenues. Return on equity was a very solid 22.9%.

Outlook

Despite the small earnings miss, analysts significantly raised their estimates for both 2011 and 2012 following the press release. In fact, earnings estimates have been moving consistently higher for BNS over the last several months:

BNS: The Bank of Nova Scotia

It is a Zacks #2 Rank (Buy) stock.

Based on consensus estimates, earnings per share is expected to grow 23% in 2011 to $4.76 and 8% in 2012 to $5.15.

Dividend

In addition to strong earnings growth, BNS pays a dividend that yields a juicy 4.2%. Since 2002, BNS has raised its dividend at a compound annual growth rate of 12.5%.

Its payout ratio is a manageable 50%, so as long as earnings grow, expect the dividend to grow too.

Valuation

Valuation looks attractive with shares trading at just 10.5x 2011 earnings, below its 10-year median of 12.4x. Its price to book ratio of 2.1 is also a discount to its 10-year median of 2.5.

The Bottom Line

With a stable history, strong earnings growth projections and a dividend yield north of 4%, BNS looks very attractive at just 10.5x 2011 earnings.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research.

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