Thursday, May 9, 2019

A Current AIM International Equity Holding: Bank of Nova Scotia (BNS, $54.63): “Banking on Avoiding its Nova” By: Robert Metcalf III, AIM Student at Marquette University

Bank of Nova Scotia (BNS, $54.63): “Banking on Avoiding its Nova”
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.


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

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