Can Bank of Nova Scotia Avoid a Canadian Housing Bust?

On Tuesday, Bank of Nova Scotia (BNS 0.71%) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed, kneejerk reaction to news that turns out to be exactly the wrong move.

Canadian banks came through the 2008 financial crisis with flying colors, as Scotiabank and its peers benefited from the more stable structural characteristics of the Canadian mortgage market. Yet while the housing market south of the border has retrenched to relative bargain-levels, Canadian real estate remains extremely expensive, especially in key markets. That has raised concerns of potential trouble ahead. Let's take an early look at what's been happening with Bank of Nova Scotia over the past quarter and what we're likely to see in its quarterly report.

Stats on Bank of Nova Scotia

Source: Yahoo! Finance.

Can Bank of Nova Scotia keep growing this quarter?
Analysts have gotten more optimistic about Scotiabank's earnings prospects in recent months, boosting their estimates for the April quarter by a penny per share and adding $0.04 to their full-year fiscal 2013 projections. The stock, meanwhile, has stayed in neutral recently, with a decline of about 1% since mid-February.

U.S. investors first became aware of the relative strength of Canadian banks during the U.S. financial crisis, but since then, they've realized the benefits of looking north of the border. Canada does have its own systemically important banks, which include not only Scotiabank but also Royal Bank of Canada (RY 0.49%), Bank of Montreal (BMO -0.77%), and three other large financial institutions, but high capital requirements have demonstrated their creditworthiness and relative safety.

Yet trouble could be brewing in the industry. Yesterday, Toronto-Dominion (TD 0.46%) reported disappointing results for its most-recent quarter, with slowing loan growth in Canada despite having extensive U.S. operations that give it geographical diversity. Scotiabank also gets a substantial amount of business outside Canada's borders, although the U.S. is only a small part of operations that extend throughout the Americas and Asia. Still, Canada represents more than half of Scotiabank's revenue, and despite measures put in place by the Canadian government to protect the mortgage market, downgrades of Scotiabank as well as Bank of Montreal, TD, RBC, and several other Canadian banks from various credit agencies over the past year have made investors increasingly concerned about the state of the market.

One big transaction that has helped bolster Scotiabank's growth was its acquisition of ING Direct Canada last November. Adding millions of customers who are used to low-maintenance, self-directed banking services from ING Direct Canada's online banking platform will help increase Scotiabank's assets and open new cross-selling opportunity to customers that could lead to even further business. It may take time for Scotiabank to integrate its new customers fully, but they nevertheless represent a major opportunity for the bank.

In Scotiabank's quarterly report, watch to see if the company follows TD's lead in implementing further cost-cutting to try to improve profitability. If a downturn in housing comes from weaker prospects for the country's resource-based economy, then investors should be confident in assessing Scotiabank's ability to weather the storm.

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