BANK OF NOVA SCOTIA $55 (Toronto symbol BNS; Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.1 billion; Market cap: $60.5 billion; Price-to-sales ratio: 2.2; Dividend yield: 4.0%; TSINetwork Rating: Above Average; www.scotiabank.com) is Canada’s third-largest bank, with assets of $637.1 billion.

During the financial crisis, the bank’s revenue fell 4.9%, from $12.5 billion in 2007 to $11.9 billion in 2008 (fiscal years end October 31). As the crisis passed, revenue rebounded by 45.6%, to $17.3 billion, in 2011.

Earnings fell 23.9%, from $4.01 a share (or a total of $4.0 billion) in 2007 to $3.05 a share (or $3.0 billion) in 2008. That’s largely because the bank’s loan-loss provisions rose as some of its clients fell behind on their payments. Writedowns of securities also contributed to the drop. However, earnings recovered to $3.31 a share (or $3.4 billion) in 2009, and reached $4.62 a share (or $5.0 billion) in 2011.

In the three months ended January 31, 2012, the bank’s earnings rose 16.1%, to $1.3 billion from $1.2 billion a year earlier. Earnings per share rose 11.1%, to $1.20 from $1.08, on more shares outstanding. If you exclude a gain on the sale of real estate in western Canada, the bank would have earned $1.12 a share in the latest quarter. Revenue rose 10.9%, to $4.6 billion from $4.2 billion.

Bank of Nova Scotia continues to set aside less money to cover bad loans: loan-loss provisions fell 3.6% in the latest quarter, to $265 million from $275 million. Bad loans now account for just 0.55% of total loans, down from 0.72%.

Set to profit from retiring boomers

Acquisitions have played a large role in Bank of Nova Scotia’s recent growth. In February 2011, the bank paid $3.0 billion in cash and stock for the 81% of DundeeWealth Inc. that it did not already own. DundeeWealth manages investments and operates a brokerage business. It also owns the Dynamic family of mutual funds and provides financial planning and investment advice.

This big purchase is already starting to pay off: it contributed $111 million to Bank of Nova Scotia’s 2011 earnings.

The bank’s growing wealth management business (which now provides 21% of its total earnings) puts it in a good position to profit as more baby boomers approach retirement age.

Bank of Nova Scotia also continues to expand internationally: it now gets 27% of its earnings from roughly 50 countries besides Canada. It’s particularly interested in building up its operations in South America. In 2011, it spent around $340 million buying banks in Chile, Brazil and Uruguay.

In January 2012, the bank bought 51% of Banco Colpatria, Colombia’s fifth-largest bank. Bank of Nova Scotia paid $500 million U.S. in cash plus 10 million common shares worth $518 million (Canadian). It now plans to merge its wholesale banking operations in Colombia, which focus on corporate clients, with Banco Colpatria.

The bank also continues to expand in Asia. It recently agreed to buy 19.99% of the Bank of Guangzhou (the Chinese government owns the remaining 80.01%). This bank is China’s 29th largest, with 84 branches. Bank of Nova Scotia will pay $719 million when the deal closes later in 2012.

Drop in efficiency is just a blip

These new businesses have increased the bank’s operating expenses. Its productivity ratio (non-interest operating expenses divided by revenue—the lower, the better) worsened to 53.5% in the latest quarter from 53.3% a year earlier.

However, the bank’s efficiency should improve once it fully integrates its latest purchases. Moreover, the current figure is still well below its target productivity ratio of 58%.

Bank of Nova Scotia also has limited exposure to the debt problems in Europe. It holds just $459 million in sovereign bonds from Greece, Spain, Portugal, Italy and Ireland. If you include its debt holdings of individual banks and companies in these countries, the bank’s total exposure is a still moderate $2.8 billion.

The bank is now looking into selling Scotia Plaza, its 68-storey office building in downtown Toronto. New international regulations require banks to maintain more capital to cover potential loan losses. By selling real estate and other non-core assets, banks can raise cash without issuing shares, which would dilute the holdings of existing shareholders. A sale could raise $1 billion.

The stock has gained 8% since the start of 2012. It trades at 11.7 times the $4.70 a share that the bank will probably earn in 2012.

Two dividend hikes in the past year

Thanks to its improving outlook, Bank of Nova Scotia has raised its dividend twice in the past year. The current annual rate of $2.20 a share, up 5.8% from the old rate of $2.08, yields 4.0%.

Bank of Nova Scotia is a buy.