Wealth Management Acquisitions Boost The Bottom Line

BNS - Scotia Bank

The Bank of Nova Scotia or Scotiabank is a leading international bank in Canada. The bank provides a broad range of products and services in personal and commercial banking, wealth management, private banking, corporate and investment banking, and capital markets.

The bank has a presence across Canada (55% of 2019 earnings), the Pacific Alliance countries (23%), the U.S. (9%), Caribbean region (5%), and international markets (8%) of Europe, Asia, Australia. The six key markets of Canada, the U.S., and the Pacific Alliance countries, contribute over 80% of the bank’s earnings.

Scotiabank operates through Canadian Banking (49% of 2019 earnings), International Banking (34%), and Global Banking and Markets (17%) segments. The bank serves more than 10 million customers through a network of 950 branches and more than 3,650 automated banking machines in Canada. Its international banking serves more than 11 million retail, corporate, and commercial customers through more than 1,900 branches and well-established franchises. As a leading financial services provider in the Americas, Scotiabank caters to more than 25 million customers and has assets worth $1 trillion (as of October 2019).

Investment Data

Revenue Growth & Market Exposure

Scotiabank is diversified by business and geographies which reduces overall risk and volatility. The bank has tremendous opportunities to expand its scale in Latin America and the U.S. which are prominent markets for the bank. It generates nearly 80% of its earnings from high quality and stable businesses which gives stability to its cash flows. Scotiabank is poised to grow on the back of strong earnings momentum across personal, commercial and wealth businesses. It is further strengthening its core Canadian Banking franchise by the acquisition of Wealth Management businesses. With a rich history of 187 years, the bank has built a deep institutional knowledge base, leading-edge capabilities, and strong customer loyalties.

Scotiabank is growing organically as well as through successful acquisitions. The integration of significant acquisitions continues to progress well. As a result of successful integrations, the bank is demonstrating improved market share, higher customer retention rates, and a strong performance against expected synergies. It is also investing in technology to strengthen its digital banking and improve customer experience and efficiency. It was recognized as the industry leader in mobile banking by J.D. Power, and it also launched a new mobile banking app in Canada.

Scotiabank is increasing its scale and market share in key markets through strategic capital deployment. It has been actively redeploying capital through a series of acquisitions and divestitures to reposition its geographic footprint. Global Wealth Management’s acquisition of MD Financial and Jarislowsky, Fraser last year has resulted in AUM growth of ~50% since the end of 2017 to over $300 billion. Scotiabank announced the sale of operations in Puerto Rico and the U.S. Virgin Islands which should further simplify its footprint in Central America and the Caribbean. The divestitures closing in 2020 will result in an after-tax gain of ~$450 million to shareholders. Scotiabank, however, suffered a slowdown in its global banking and markets segment, as a result of challenging market conditions, lower client financing activity, and higher expenses. The bank expects a modest improvement in global growth in 2020 despite the trade tensions between the U.S and China.

Over the past four years, Scotiabank has undertaken measures to simplify its footprint, improve its earnings quality and reduce its risk profile. The bank’s repositioning efforts are mostly complete now. Revenues should keep growing on the back of strong asset and deposit growth across all its business segments as well as positive operating leverage.

Dividends

Scotiabank is a Canadian Dividend Aristocrat, paying dividends every year since its foundation in 1832. The bank has a sound track record of returning capital to its shareholders through dividends and share buybacks. Since May 2018 the bank has repurchased approximately 21 million shares. The bank’s capital position remains strong with a CET1 capital ratio of 11.1%, which further provides capital deployment flexibility in the form of dividends disbursements and share buybacks. Strong internal capital regeneration, prudent management of risk-weighted asset growth, and the divestitures of non-core businesses should also support future capital growth.

Scotiabank has clocked an impressive dividend growth rate of 6.5% CAGR over the past five years. The bank’s latest annual dividend hike was more than 9% with a very attractive dividend yield of 4.9% and a reasonable payout ratio of 54% currently. It has a target payout range of 40%-50%. The bank has also grown its earnings at 8.4% CAGR over the last decade.

Scotiabank aims to keep its productivity ratio (expenses as a percentage of revenue) at less than 50%. The bank is targeting an income growth of 7%+ and 9%+ in its Canadian and international banking businesses, respectively over the medium term. Acquisitions are further expected to contribute approximately $250 million of earnings this year and over $400 million in 2020. The economic activity in Canada remains robust in light of strong population growth driven by immigration, robust employment and wage growth, and a stronger housing market. Scotiabank should keep increasing its dividend at the same pace in the future.

Competition

The Canadian personal and commercial banking segment is highly competitive. Scotiabank competes with other leading Canadian banks like TD Bank, Royal Bank, Bank of Montreal, CIBC and National Bank. National Bank ranks amongst the six largest commercial banks in Canada, while CIBC caters to 11 million individual, small business, commercial, corporate and institutional clients in Canada, the U.S. and around the world. Bank of Montreal is the eighth largest bank in North America by assets.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYieldYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:RYRYRoyal BankFinancial ServicesBanks - Diversified0.6491.20129.8011.6812.257.810.054.740.553144.320.121067Tollbooth - UnregulatedNONOYESNOCanada1
TSE:TDTDTD BankFinancial ServicesBanks - Diversified0.6859.4878.6510.4512.255.690.055.310.555443.160.143267Tollbooth - UnregulatedNONOYESNOCanada1
TSE:BNSBNSScotia BankFinancial ServicesBanks - Diversified0.7354.4465.958.9712.256.070.076.610.593143.600.125568Tollbooth - UnregulatedNONOYESNOCanada1
TSE:BMOBMOBank of MontrealFinancial ServicesBanks - Diversified0.6970.7445.259.4412.257.490.065.990.566144.240.097858Tollbooth - UnregulatedNONOYESNOCanada1
TSE:CMCMCIBCFinancial ServicesBanks - Diversified0.7290.1329.309.9012.259.100.066.480.641845.840.113568Tollbooth - UnregulatedNONOYESNOCanada1
TSE:NANANational BankFinancial ServicesBanks - Diversified0.6860.1420.1710.0112.256.010.054.720.472542.840.115867Tollbooth - UnregulatedNONOYESNOCanada1
TSE:CWBCWBCanadian Western BankFinancial ServicesBanks - Regional0.7022.992.017.6812.252.990.055.050.388041.160.105468Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:LBLBLaurentian BankFinancial ServicesBanks - Regional0.4829.031.2510.5312.252.760.065.510.579741.600.090625Tollbooth - UnregulatedNONOYESNOCanada1

Bottom Line

Scotiabank is targeting to deliver organic growth in the mid-single-digits in 2020. The bank has been experiencing growth across its leading markets in Canada, Latin America, and Pacific Alliance countries. Though investors are concerned about global economic growth and its impact on interest rates, diversified exposure and increasing market share in high-quality growth markets should drive Scotiabank’s future growth. Strong EPS growth, better than expected contributions from recent acquisitions, progress towards geographic repositioning and improving risk profile should support future growth.

BNS vs Indexes

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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