BANK OF NOVA SCOTIA $56 (Toronto symbol BNS; Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.2 billion; Market cap: $67.2 billion; Price-to-sales ratio: 2.4; Dividend yield: 4.3%; TSINetwork Rating: Above Average; www.scotiabank.com) is Canada’s third-largest bank, with assets of $754.2 billion.

The bank has recovered strongly from the 2008 financial crisis. Revenue rose 65.9%, from $11.9 billion in 2008 to $19.7 billion in 2012 (fiscal years end October 31). Earnings gained 98.6%, from $3.0 billion in 2008 to $6.0 billion in 2012. Due to more shares outstanding, earnings per share rose at a slower pace of 71.1%, from $3.05 to $5.22. Without a one-time gain on the sale of real estate, it would have earned $4.61 a share in 2012.

Much of this growth is due to acquisitions. In the past six years, Bank of Nova Scotia has spent over $14 billion buying smaller financial services firms. It purchased most of these assets from banks that wanted to exit certain markets, so it probably got many of them at bargain prices.

For example, in November 2012, the bank paid $3.1 billion for ING Bank of Canada, which operates as ING Direct. This company’s Netherlands- based parent, ING Group, ran into trouble during the financial crisis and is selling assets to repay the bailout funds it received from the Dutch government.

ING Direct offers a variety of no-fee banking services, mainly over the Internet. It has 1.8 million customers and $30 billion in deposits. Bank of Nova Scotia is keeping this operation separate from its regular banking business. However, it can only use the ING Direct brand for another year.

This purchase helped push up the bank’s earnings by 9.7% in the three months ended April 30, 2013, to $1.6 billion from $1.5 billion a year earlier. Bank of Nova Scotia sold shares to raise cash to buy ING Direct. Due to more shares outstanding, earnings per share gained 7.0%, to $1.23 from $1.15. Revenue rose 11.0%, to $5.2 billion from $4.7 billion.

Larger provisions a prudent move

In response to uncertain economic conditions in Canada and overseas, Bank of Nova Scotia set aside $343 million to cover bad loans in the latest quarter. That’s up 29.9% from $264 million a year earlier. Even so, bad loans were just 0.44% of its total loans, down from 0.57% a year earlier.

Bank of Nova Scotia also continues to expand its international operations, which supply 25% of its earnings. It’s particularly interested in Latin America and Asia, where a growing number of younger people are entering the workforce and looking to buy homes or start investing.

In April 2013, the bank paid $260 million for 50% of AFP Horizonte, which manages pension funds in Peru. This business has 1.4 million clients and $9 billion U.S. of assets under management. SURA Asset Management owns the other 50%.

Demand for pension fund services is growing quickly in Latin America. As well, Bank of Nova Scotia has a long history in this region, which cuts the risk of this investment.

Bank of Nova Scotia and SURA plan to divide AFP Horizonte. Following the split, Bank of Nova Scotia will merge this business with its existing pension plan operations in Peru. The combined business will have 1.9 million clients and $10.3 billion U.S. in assets under management.

Waiting for word on Chinese deal

The bank also continues to expand in China, where it has operated for over 30 years. In September 2011, it agreed to pay $719 million for 19.99% of the Bank of Guangzhou; the Chinese government owns the remaining 80.01%. Bank of Nova Scotia hopes the Chinese government will approve the sale in the next few months.

Long delays like this are typical in China. Bank of Nova Scotia had to wait four years for regulators to approve its 2002 deal to buy a minority stake in Bank of Xi’an. It now owns 18.1% of this bank.

Bank of Nova Scotia is also cutting its exposure to the debt problems in Europe. It holds just $239 million in sovereign bonds from Greece, Spain, Portugal, Italy and Ireland. If you include the debt holdings of its individual banks and companies in these countries, the bank’s total exposure is a low $1.6 billion.

ING Direct and other acquisitions have increased the bank’s operating expenses. Even so, its productivity ratio (operating costs like salaries and rent, divided by revenue—the lower, the better) improved to 53.6% in the latest quarter, from 53.7% a year earlier. The bank’s efficiency should continue to improve once it fully integrates its latest purchases.

More dividend hikes seem likely

Thanks to its improving outlook, Bank of Nova Scotia recently raised its quarterly dividend by 5.3%, to $0.60 a share from $0.57. The new annual rate of $2.40 yields 4.3%. The stock has gained 10% in the past year, but still trades at just 10.9 times the $5.13 a share that the bank will probably earn in 2013.

Bank of Nova Scotia is a buy.