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The Canadian banking business is going through robust instances–and it’s by no means been a greater time to spend money on Canadian banks. That assertion would possibly sound paradoxical, however if you perceive one of many essential issues about Canadian banks, it makes excellent sense.

Canadian banks don’t simply do enterprise in Canada. In truth, many, are extremely worldwide in scope. TD Financial institution is known for its U.S. Retail enterprise, which makes up 30% of its whole earnings and is rising bigger yearly. TD isn’t the one Canadian financial institution with a great deal of worldwide publicity both. From RBC to CIBC, there are many Canadian banks making a splash on the world stage.

That mentioned, not all Canadian banks are equal of their quantity of overseas funding. Like RBC, some have solely minimal operations in overseas international locations, whereas others are virtually outlined by their worldwide and/or U.S. presence.

If you happen to’re on the lookout for a financial institution with a serious worldwide footprint to offset potential losses as a consequence of credit score points in Canada, Financial institution of Nova Scotia (TSX:BNS)(NYSE:BNS) could also be your greatest wager. To know why that’s the case, you first want to know the issues going through Canada’s banking sector.

Issues going through the Canadian banking sector

I wouldn’t be the primary particular person to inform you that Canadian banks are in a tricky place. Hedge fund managers, like Neuberger Berman’s Steve Eisman are at the moment betting in opposition to the Huge Six in a serious method. Their concept? Credit score high quality is deteriorating, and banks haven’t adequately ready themselves for the results.

This concept has so much to suggest it. Canadian family debt is at the moment sitting at $2 trillion, which, when mixed with the truth that Canadian homes are among the many least reasonably priced on the earth, doesn’t make for a easy financial experience. Throw tanking home costs in a number of key markets into the combination and also you’ve obtained a recipe for catastrophe.

The components outlined above represent the principle thesis for shorting Canadian banks. Nonetheless, banks with worldwide publicity could also be a lot much less weak to them.

Scotiabank’s PCL

“Provisions for credit score losses” is a banking time period used to explain funds that banks put aside for defaults. In its most up-to-date quarter, Scotiabank’s whole PCL was at $873 million, up from $534 million in the identical quarter a 12 months earlier than, thereby indicating that Scotiabank believes that it’s going through a a lot higher danger of defaults than it did beforehand. Nonetheless, in contrast to many banks, it has a robust weapon to counter any such losses.

Worldwide diversification

Scotiabank’s ace within the gap is its worldwide diversification. Effectively generally known as the “most worldwide Canadian financial institution,” it has sizeable operations in South America, Asia and Europe. In its most up-to-date quarter, Scotiabank’s Canadian financial institution earned $1 billion, whereas its worldwide banks earned $700 billion, which signifies that Scotiabank’s worldwide operations are virtually as massive as its Canadian ones.

The explanation this issues is that it offers Scotiabank with a measure of geographic diversification to guard it from dangers at residence. Canadian credit score and housing market issues aren’t going away any time quickly–Scotiabank’s personal rising PCL is an affidavit to that–so should you purchase a Canadian financial institution, it pays to purchase one which’s extra worldwide. Scotiabank, with 40% of its operations outdoors of Canada, suits the invoice completely.

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Idiot contributor Andrew Button owns shares of TORONTO-DOMINION BANK. Financial institution of Nova Scotia is a advice of Inventory Advisor Canada.