Scotiabank is refocusing – just be patient

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 (more than 50% of revenues), followed by the U.S., and the Caribbean and Central America, Pacific Alliance, and international markets like Europe, Asia, Australia.

It ranks third by market share in the US and Canada. Scotiabank operates through Canadian Banking (38% of net income in the last six months), International Banking (~20%), Global Wealth management (~16%), Global Banking and Markets (~22%), and other (~4%) segments.

The bank serves more than 11 million customers through a network of 952 branches and more than 3,500 automated banking machines. Its international banking serves more than 10 million retail, corporate, and commercial customers through more than 1,400 branches and well-established franchises.

As a leading financial services provider in the Americas, Scotiabank caters to more than 21 million customers and has assets worth $1,136 billion at the year-end.

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Key Investment Data

 

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Revenue Growth & Market Exposure

Scotiabank is diversified by business and geographies which reduces risk and volatility. The bank generates nearly 90% of its earnings from its six core markets of Canada, the U.S., Mexico, Peru, Chile, and Colombia. It has focused its geographic footprint to currently 30 countries from 54 in 2013.

The bank is poised to grow on the back of strong earnings momentum across personal, commercial, and wealth businesses. Scotiabank is also strengthening its core Canadian Banking franchise with the Wealth Management business.

The bank is increasing its scale and market share in key markets through strategic capital deployment. It is also investing in technology to strengthen its digital banking and improve customer experience and efficiency. Scotiabank achieved a digital adoption rate of 58% and total digital sales of 26%.

With a rich history of 185 years, the bank has built a deep institutional knowledge base, leading-edge capabilities, and strong customer loyalties.

An increase in both retail and business banking should drive Scotiabank’s Canadian banking business growth, whereas its international banking business should benefit from its focus on the high-growth markets of Mexico, Peru, Chile, and Colombia. These countries have a young and dynamic population with huge untapped potential. The bank is growing organically as well as through successful acquisitions as is evident by its strong track record of integrating businesses. 

Scotiabank’s Canadian and international banking business was negatively impacted by an increased provision for credit losses driven by COVID-19. However, quarterly earnings have started to improve on the back of the bank’s diversified business platform, and economic recovery in its core markets.

The bank also witnessed a strong rebound in fee income, lower provision for credit losses, as well as solid asset and deposit growth. Both AUM and AUA increased by 19% and 20%, respectively from the prior year. The provision for credit losses was $496 million, compared to $1,846 million, a decrease of more than 70%. Its revenues have grown at 7%+ CAGR over the last decade.

You are free to hold BNS on either exchange (TSX or NYSE) since it is a dual listed stock. It really depends where you money is and in what currency you want to receive your dividends.

Dividends

Scotiabank has been paying dividends every year since its foundation in 1832. The bank has clocked an impressive dividend growth of ~6% CAGR over the past decade. It has an attractive dividend yield of 4.5% with an established track record of dividend growth for more than 40 years. Its CET1 ratio stands at 12.3% currently, the strongest in the last five years.

A strong balance sheet, capital, and liquidity ratios provide capital deployment flexibility in the form of dividend disbursements and share buybacks. The bank has also grown its earnings at a rate of more than 3% CAGR over the past decade.

The bank is a Dividend Aristocrat. Scotiabank has a payout ratio of 57% currently and a target payout range of 40%-50%. It last raised its dividend by 3.5% in 2019. The bank, however, suspended share buybacks and dividend increases as part of COVID-19 measures. It did not repurchase any common shares during the six months ended April 30, 2021.

Scotiabank remains well capitalized to support its strategic growth plans. Strong performance in the capital markets business and advisory pipeline should act as tailwinds for the balance of the year. The bank’s International Banking also got a boost from strong economic recovery across the Pacific Alliance.

Scotiabank’s fee-based business model further grants visibility to cash flows. Diversified footprint and access to high-quality growth markets is a unique differentiator. The bank is targeting an EPS growth of 7%+ over the medium term. Scotiabank is expecting future growth on the back of sharp client focus, strong capital market offerings, and an expanding footprint in the Americas.

Scotiabank (BNS) historical yield
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Competition

The Canadian personal and commercial banking segments are highly competitive.

Scotiabank competes with other leading Canadian banks like TD Bank, Royal Bank, Bank of Montreal, Canadian Imperial Bank of Commerce, 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 - Diversified0.67126.18179.8212.8212.829.980.033.420.439044.320.102867Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:TDTDTD BankFinancial ServicesBanks - Diversified0.7782.95150.8410.6810.686.720.043.810.406043.160.130478Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:BNSBNSScotia BankFinancial ServicesBanks - Diversified0.7277.8794.3412.5512.556.270.054.620.572043.600.103168Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:BMOBMOBank of MontrealFinancial ServicesBanks - Diversified0.63123.5379.9213.5613.5610.450.033.430.465044.240.076757Tollbooth - UnregulatedNONOYESNOCanada1
TSE:CMCMCIBCFinancial ServicesBanks - Diversified0.62145.0764.5812.2312.2312.670.044.030.491045.840.086668Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:NANANational BankFinancial ServicesBanks - Diversified0.6395.4932.2312.8612.867.750.032.970.380042.840.098267Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:CWBCWBCanadian Western BankFinancial ServicesBanks - Regional0.6934.012.9610.7110.713.260.033.410.365041.160.093977Tollbooth - UnregulatedYESYESYESNOCanada1
TSE:LBLBLaurentian BankFinancial ServicesBanks - Regional0.4242.401.8411.5611.564.190.043.770.435041.600.037715Tollbooth - UnregulatedNONONONOCanada1

Bottom Line

As the tenth largest foreign banking organization by assets in the U.S. and a leading global financial institution, Scotiabank is known for its quality of integrity, client service, and a large suite of products and services.

The bank is expecting solid growth in Canada over the next two years driven by rebound effects and high commodity prices, strong wealth effects from equities, and the housing market.

The U.S. is also forecast to grow rapidly than Canada. The bank’s diversified exposure to high-quality banking markets also positions it well for strong growth potential and superior returns.

Scotiabank (BNS) historical pe
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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.