Refocusing should pay off – 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 (64% of 2020 earnings), International Banking (31%), Global Banking and Markets (20%) 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.

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 48% in 2020. It launched new digital account opening solutions across all markets. 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. It also closed four strategic divestitures totaling $6 billion as part of strategic re-positioning recently.

Scotiabank’s Canadian and international banking business was negatively impacted by an increased provision for credit losses driven by COVID-19. FY2020 adjusted EPS was down 25% YoY, largely impacted by PCLs. However, fourth-quarter earnings improved due to strong asset growth and stable margins.

The bank also witnessed a strong performance in Capital markets, and good loan and deposit volume growth in Business banking.

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 5.25% with an established track record of dividend growth for more than 40 years.

Its CET1 ratio stands at 11.8% 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 7% CAGR over the past decade.

Scotiabank is a Canadian Dividend Aristocrat. The bank’s latest annual dividend hike was 3%+. Scotiabank has a payout ratio of 67% currently and a target payout range of 40%-50%. It returned $4 billion in dividends and bought 5.6 million shares for $414 million for the year ended October 2020. The bank, however, suspended share buybacks as part of COVID-19 measures. 

Scotiabank aims to keep its productivity ratio (expenses as a percentage of revenue) at less than 50%. Its fee-based business model further grants visibility to cash flows. Scotiabank’s 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.

Competition

The Canadian personal and commercial banking segment 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.

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.

Resilient operations, strong asset quality, expense discipline, and digital acceleration should drive Scotiabank’s future growth. The bank’s diversified exposure to high-quality banking markets also positions it well for strong growth potential and superior returns.