By:
Robert Metcalf III, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Bank of Nova Scotia (NYSE:BNS) The Bank of Nova Scotia is an
international bank and a financial services provider located in Toronto,
Canada. BNS engages in the provision of financial products and services for
commercial, corporate and retail customers. In addition, offers personal
banking, wealth management, insurance, corporate and institutional services and
business banking.
• BNS’s international
banking segment reported strong results in Q1 2019, with adjusted annual
earnings growth of 18% from Q1 2018. BNS also saw loan origination grow 29% in
Q1 due to the impact of their recent acquisitions.
• BNS reported
significant progress in integration efforts for their recent acquisitions of
BBVA Chile and MD Financial in 2018.
• BNS has signaled strong
capital position as they reported a Q1 2019 CET 1 ratio of 11.2%.
• BNS increased their
annual dividend by a cumulative $0.06 or 8% over the course of the year.
Key
points:
BNS’s growth in their
international banking segment was primarily driven by higher net interest
income due to strong loan and deposit growth in their Pacific countries. In
addition, the impact of their acquisitions and a higher non-interest income
contributed to this growth. Non-interest income up $260 million in Q1 2019
compared to Q1 2018 of which was driven by higher banking fees, higher trading
revenues and the impact of acquisitions.
BNS’s integration
execution for their recent acquisition of BBVA Chile and MD Financial is on
track and expected to be completed by the end of 2019. A few integration
highlights for BBVA include over $30 million of synergies captured to date and
have now re-branded all of their business channels. Highlights for MD Financial
include very high customer retention rates as they have seen 98% client
retention with very minimal advisor attrition. BNS is on track to achieve
~$0.15 adjusted diluted EPS accretion in 2020 for these acquisitions.
BNS’s capital positioning
shows strong internal capital generation as their CAT 1 ratio is 11.2%. This
strong capital position further supports the ability to continue its attractive
dividend yield as well as its continued emphasis on growth across the regions.
Management has noted they expect their CET 1 ratio to remain above 11%
throughout 2019. This positions the Bank well to continue to invest in line
with its strategic objectives such as the integration of recent acquisitions.
What
has the stock done lately?
Following their Q1
earnings in March, their price dropped from roughly $55.50 to $52.76 due to
some of their business being impacted by market volatility. BNS’s stock has
increased by 2.53% in the past month stemming from strong integration metrics
from their recent 2018 acquisitions.
Past
Year Performance:
BNS has decreased -10.70% in value over
the past year while their main competitors had positive returns (RBC +5.18%, TD
+1.18%, BMO +4.62%). However, BNS shows signs of being undervalued now as their
P/E is at 10.60x, representing a discount to their peer average of 11.94x.
Source:
FactSet
My
Takeaway:
BNS reported a
lower-than-expected quarterly profit in their Q1 report as expenses and market
volatility were higher. However, BNS demonstrated continued progress in the
execution of their strategy to de-risk the Bank, simplify operations and
position the Bank for further growth. Their international business segment saw
major growth as they began to see synergies from their 2018 acquisitions which
are poised for success. In addition, BNS is trading at a discount to its peers with
a P/E of 10.60x compared to peers at 11.94x.
Source:
FactSet
