Since the official start of the recession in the United States, as determined by the National Bureau of Economic Research, the Bank of Nova Scotia (TSX: BNS, NYSE: BNS) has bested broad stock market indexes such as the S&P 500 and the S&P/Toronto Stock Exchange as well as all of its major Canadian peers. Of course it’s trounced big American banks, too.

And it was one of three Big Six Canadian banks that exceeded fiscal 2011 second-quarter expectations and left analysts looking forward to sustainable growth in quarters ahead. The primary difference maker, illustrating Scotiabank’s solid positioning entering the downturn in the fourth quarter of 2007 as well as its execution in still-evolving recovery.

That the world is undergoing profound political and economic changes is more evident every day. The US will remain the epicenter of global power, but that power is becoming more diffuse. This shift coincides with the rise of new economic engines in what were once underserviced regions of the world–new middle classes in Latin America and Asia.

This is the key to the long-term investment story in Canada. The US–with which it forms, still, the largest bilateral trade relationship in the world–will always be a key to Canada’s growth. But inexorable demand for resources has Canada at the crossroads of emerging and developed markets. Its stable institutions make sure wealth is built for the long term.

The International

In the November 2007 Canadian Currents I wrote:

What sets Bank of Nova Scotia (TSX: BNS, NYSE: BNS) apart from its peers is its international exposure. More than any of the remaining Big Five of Canadian banking, Scotiabank is making money on emerging economies.

Scotiabank is focusing on Latin American and Caribbean countries where its market share remains below 10 percent and on Asian countries where it’s currently operating. The bank is looking to grow market share in countries where it already has a retail presence and hopes to expand into complementary businesses such as insurance and wealth management.

Bank of Nova Scotia recently doubled its presence in Chile with the acquisition of Banco del Desarrollo for USD1.03 billion, boosting its market share there to 6 percent. In Asia, Bank of Nova Scotia is targeting China, Thailand, Malaysia and India for growth. It has a minority stake in Dalian Bank in China and is in ongoing discussions to increase its ownership. The bank also recently purchased a minority stake in Thailand-based Thanachart Bank.

I’d slapped a generic “buy” recommendation on Scotiabank in a previous Currents article introducing non-trust Canadian dividend-payers to Canadian Edge coverage in April 2007, “for the healthy yield and its effective entry into the global banking market.” These investments continue to pay off.

Scotiabank has long been our favorite among the Big Six, in fact since we added it to How They Rate. Fiscal 2011 second-quarter results demonstrate that it is a model for a country that is and should reorienting its own economy to capitalize on new realities.

Although National Bank of Canada (TSX: NA, OTC: NTIOF) again stole some spotlight by yet again boosting its dividend, Scotiabank’s international exposure–in particular operations in Mexico and Chile but including emerging markets in Southeast Asia as well–point the way to continued expansion of lending and opportunities to boost net interest income, or what banks receive in interest on assets such as commercial loans and personal mortgages minus what they pay out for interest on liabilities such as bank accounts.

Bank of Montreal (TSX: BMO, NYSE: BMO) also exceeded forecasts, but it, like National Bank, is more deeply rooted in North American than Scotiabank. The same goes for Royal Bank of Canada (TSX: RY, NYSE: RY), the country’s biggest, and Toronto-Dominion Bank (TSX: TD, NYSE: TD) and Canadian Imperial Bank of Commerce (TSX: CM, NYSE: CM), the second- and fifth-largest. Margins are shrinking at home and in the US, the Big Six are undercutting each other on mortgages and commercial lending to win market share. This is starting to erode what makes up the lion’s share of profits for the banks.

Scotiabank wasn’t immune to local troubles; like the other Canadian banks, trading revenue was soft, and North American margins deteriorated. But its greater exposure to international markets set it apart, as Peru, Mexico and Chile generated fatter margins and growing loan volumes. Scotiabank reported cash earnings per share of CAD1.12, up 8 percent from a year ago and 3 cents better than the consensus forecast. Net income for the three months ended Apr. 30 climbed 41 percent to a record CAD1.54 billion (CAD1.36 per share) from CAD1.1 billion (CAD1.02 per share) a year ago. International banking surged 68 percent to a record CAD02 million because of increased lending in Asia, Peru, Chile and the Caribbean.

One of the pillars of the Canadian story from an American perspective is diversity: Canada is a vehicle to gain exposure to emerging markets while building wealth over the long term. Scotiabank in many ways embodies this; its diversification reduces vulnerability and provides other sources of growth.

The major banks all reported a drop in net interest margins in their Canadian operations. Scotiabank’s retail banking profits fell 1.6 percent to CAD444 million, as net interest margin declined to 2.32 percent in the second quarter from 2.42 percent the first quarter and 2.58 percent a year ago. The international front was a much different story: Net interest margin was 4.44 percent, up from 4.29 percent in the first quarter and 4.04 percent a year ago, driving a record profit of CAD376 million. Cash earnings from international operations rose 46 percent.

Bank of Nova Scotia is a buy up to USD60 on its geographic diversity.

Royal Bank said May 27 that profit climbed 13 percent to CAD1.51 billion. Net interest margin fell to 1.55 percent from 1.69 percent a year earlier, but Canada’s largest bank (market cap CAD79.13 billion) boosted its payout for the first time since the recession ended. Royal Bank of Canada, its 8 percent dividend hike notwithstanding, is a hold.

No. 2 TD Bank (CAD71.55 billion) reported that net interest margin fell to 2.38 percent in the second quarter from 2.41 percent in the first and 2.39 percent a year ago. Profit rose 13 percent to CAD1.33 billion but nevertheless missed analysts’ consensus estimate.

Canadian retail and commercial business earnings were up 11 percent in the second quarter, and US banking earnings showed a robust 37 percent profit boost. But Toronto-Dominion is a hold at these levels.

Bank of Montreal, also a hold, reported a 7.5 percent increase in profit to CAD800 million. Net interest income increased 12 percent.

For CIBC net interest margin was 1.94 percent, down from 2.08 percent in the first quarter and 2.16 in the second quarter of fiscal 2010. No. 5 with a market capitalization of CAD31.02 billion, the bank said earnings rose 2.7 percent to CAD678 million. CIBC is a hold.

National Bank of Canada, also a hold, said profit was CAD295 million, a 13 percent increase.