Thursday, October 29, 2020

An International Equity holding: Bank of Nova Scotia (BNS, $56.39): “Has the Nova Faded?” by: Brett Selke, AIM Student at Marquette University

 Bank of Nova Scotia (BNS, $56.39): “Has the Nova Faded?”

By: Brett Selke, 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. 


  • The BNS is an international bank and financial services company located in Toronto, Canada. BNS is considered one of the Big 5 banks of Canada in addition to Royal Bank of Canada, Toronto-Dominion Bank, Bank of Montreal, and Canadian Imperial Bank of Commerce. BNS offers personal, commercial, corporate, and commercial banking in addition to wealth management, and insurance services. It primarily serves customers retail, commercial, and corporate customers. 
  • BNS has developed a foothold in Canada as the nationwide premier mobile banking application as a result of their investment in FinTech technology. 
  • BNS has continued to maintain strong liquidity throughout the pandemic as they reported a CET1 ratio of 11.3% in Q3 2020 which was an improvement on their Q2 2020 CET1 ratio of 10.9%. The CET1 ratio is a measure of liquidity and measures a bank’s capital against its assets. 
  • BNS Canadian and International Banking segments had a poor performance in Q3 2020 with drops in revenue of 10% and 73% respectively. However, Global Wealth Management and Global Banking and Markets helped offset some of the banking losses by increasing revenue by 6% and 15% respectively in Q3 2020. 
  • BNS has doubled down on their commitment to strategically grow in the Pacific Alliance Countries or PAC (Mexico, Peru, Chile, and Colombia) Subsequently BNS has sold operations in Belize, Puerto Rico, El Salvador, Thailand, and the Dominican Republic that did not align with their new PAC repositioning strategy. 

Key Points 

Alarmingly, in Q3, both BNS Canadian and International Banking had substantial drops in revenue of 10% and 73% respectively compared to Q2. The poor performance was attributed to credit losses on performing loans, lower interest income, and lower non-interest income as a result of COVID. BNS Canadian banking division pre-COVID was expected to post low revenue growth in the future due to its segment having matured in the industry even with the implementation of its FinTech investments. However its International Banking segment was expected to exhibit strong revenue growth in the future to offset the maturity of its Canadian Banking segment. 

International banking has been repositioned to target the emerging market PAC countries specifically. Only 54.7% of BNS revenue comes from the US and Canada whereas 32.8% of its revenue comes from the PAC countries. Unfortunately, the PAC countries make up 4 of the top 6 worst effected countries in all of Latin America and the Caribbean as of October 22nd. The PAC countries are dramatically less equipped to fight a pandemic compared to Canada and only time will tell how the PAC countries manage COVID until a vaccine comes out. 

BNS improved its capital position in Q3 relative to Q2 by increasing its CET1 ratio from 10.9% to 11.3%. A strengthening of a company’s capitalization and liquidity during a pandemic is an inviting sign that BNS is in a strong position to continue business operations and to navigate the pandemic. Their improved internal capital generation and reduction of risk-weighted assets were the drivers behind the increased CET1 ratio. BNS is well capitalized as its CET1 ratio is 230 basis points above the OSFI minimum standard. 

What has the stock done lately? 

At the Q3 earnings call on August 25th the stock price was $56.10 and as of October 22, 2020 the share price rose twenty nine cents to $56.39. The stock price has been relatively stable since June 1st settling at a price range of $54.13-$60.96 for last 4 and a half months even throughout the pandemic. 

Past Year Performance: 

The Canadian Banking industry has been hit hard by COVID. Within the last calendar year the stock price has lost 25% of its value. Compared to the other 4 major Canadian BNS stock price has been the most adversely effected by COVID in the industry. Big 5 Q3 average P/E ratio is 10.84x whereas BNS is potentially undervalued as its P/E ratio is 9.6x. Its Price-Book ratio of 1.1 is on par with the Big 5 Banks’s average P/B ratio of 1.22. 

1 Year Stock Chart vs. Benchmark from FactSet

My takeaway 

BNS was added to the portfolio because of their dominant fintech, consistent (although marginal) returns from Canada and their entry into developing markets. COVID has decimated BNS international banking segment and raises more questions than answers about its future. The PAC have great growth potential for BNS’s revenue however that comes at the cost of some substantial risk. The PAC countries are far less equipped to deal with a pandemic. The success of BNS International Banking is dependent on what government aid or stimulus packages are provided and the respective national responses and management of COVID until a vaccine is introduced. Due to COVID causing a great deal of uncertainty about the future, interest rates down worldwide in the foreseeable future, BNS missing their earnings dramatically, and BNS having lost a quarter of its stock price value this year; it is my recommendation that BNS be sold from the AIM International portfolio. 

1 Month Stock Chart vs. Benchmark from FactSet