BNS Details

Decent Growth From all Segment Amidst Macro Slowdown: Scotiabank (TO: BNS) is a leading bank in North America and has strong market presence in Canada and the Pacific Alliance growth markets of Mexico, Peru, Chile and Colombia. The group offers an array of financial and banking services which includes wealth management and banking solution etc. The bank also provides services like lending, deposit, cash management and trade finance solutions to the medium and large businesses. Other banking services include debit card & credit services, mortgages and loans, investments etc. The group has a customer database of more than 10 million, across Retail, Small Business and Commercial Banking and has a network of more than 953 branches and more than 3,632 automated banking machines.

Operating Segments: The group operates through three operating segments, which are Canadian Banking, International Banking and Global Banking and Markets. During FY19, the group reported ~47% of its profits from Canadian banking segment while 17% and 36% of the earnings from global banking & markets and international banking, respectively.

Q1FY20 Operational Highlights: BNS came up with its quarterly results, wherein its revenue stood at $8,141 million, marking a growth of 7% on y-o-y basis. A strong non-interest income drove the growth in revenue. Non-interest income stood at CAD 3,749 million, up 13% on y-o-y basis. The growth was driven by higher trading revenues, underwriting and advisory fees, followed by higher banking and wealth management revenues, which were partly offset by the impact of divestitures, and lower investment gains. Net interest income stood at $4,392 million, up 3% on pcp, majorly driven by strong growth in assets and deposits across the Canadian Banking and higher contribution from asset/liability management activities along with the positive impact of acquisitions in International Banking segment. However, the negative impact of foreign currency translation, disinvestments and adoption of IFRS 16 remains a drag. Core banking margin remained unchanged at 2.45%. Net income came in at CAD2,326 million, as compared to CAD2,247 million in pcp. The provision for credit losses came in at CAD 926 million, depicted a growth of 23% on q-o-q basis, due to increase in impaired loans. Non-interest expenses witnessed a growth of 6% on pcp terms, due to an increase in the salaries and benefits and performance-based compensation and higher other expenses related to business growth.

The Bank posted decent growth in Q1FY20, which demonstrate the strength of the diversified businesses. The group is focusing on higher its investments in the technology, which is expected to deliver higher productivity through enhancing customer satisfaction. Looking at the past performance over the period of FY15-FY19, the company’s total revenue improved from CAD 24,049 million in FY15 to CAD 31,034 million in FY19, posting a CAGR of 6.6%. Net Income grew from CAD 7,213 million in FY15 to CAD 8,798 million in FY19.

 FY19 Business Highlights: For the financial year ending 31st October 2019, the Scotiabank’s revenue increased to CAD 31.0 billion versus CAD 28.7 billion in FY2018. Net interest income grew by 6% to CAD 17.1 billion in FY2019, primarily through acquisition impact. Similarly, Non-interest income has also shown growth of 10% (CAD 1.2 billion) to CAD 13.8 billion, prominently influenced by increased banking revenue and gains on investments along with 6% inorganic growth. The Company’s reported adjusted net income attributable to equity holders at CAD 8.9 billion in FY2019 as against CAD 8.7 billion in FY2018. Return on equity reported a slight decline and stood at 13.1% (FY2019) compared to 14.5% (FY2018). Productivity ratio inclined to 53.9% as against 52.3% in FY2018. The Bank CET1 ratio remained stable at 11.1%.  

Key Financial Highlights for FY19 (Source: Company Reports)

Balance Sheet Highlights: At the end of Q1FY20, the bank posted its total assets at CAD 1,154.02 billion, improved from CAD 1,086.16 billion in FY19. Deposits stood at CAD 763.85 billion, as compared to CAD 733.39 billion in FY19. Deposits from Canadian Banking grew by 5% on y-o-y basis to CAD 248 billion while international business and global banking and markets segment delivered a growth of 2% and 21%, respectively on y-o-y basis. The business reported total loans of CAD 592.28 billion, increased from CAD 566.10 billion in Q1FY19 aided by lower single-digit growth from all segments.

Snapshot of Q1FY20 Deposit Performance Segment-wise (Source: Company Reports)

Snapshot of Other Ratios: The reported its Bank’s Leverage ratio stood of 4.0% as on January 31, 2020, came lower by 20 basis points from the prior quarter, primarily due to the growth in low-risk assets. The CET1, Tier 1, total capital and Leverage ratios were well above OSFI’s minimum capital ratios. The bank delivered an improved return on equity (ROE) of 14.2%, as compared to 13.5% in Q1FY19. Common Equity Tier 1 capital ratio stood strong at 11.4%, improved from 11.1% in FY19.

Key Metrics (Source: Thomson Reuters)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 22.26% of the total shareholding. RBC Wealth Management is the entity holding maximum shares in the company at 3.65%. RBC Global Asset Management, Inc. is the second-largest shareholder, representing a holding of 3.52% in the company.

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics: The Company reported decent numbers in Q1FY20, wherein BNS posted net interest margin at 2.45%, marginally higher than the previous period of 2.40%. Efficiency ratio came in at 54.3%, higher than the previous quarter of 54.1%. Deposit growth stood at 4.2%, significantly above the previous corresponding period of 2.1%. Tier 1 Risk-Adjusted Capital Ratio grew to 12.5% from 12.2% in the previous quarter.

Key Metrics (Source: Thomson Reuters)

Outlook: The Bank has Strong balance sheet, capital and liquidity ratios. The bank is focusing on gaining traction in its six core markets of Canada, US, Mexico, Peru, Chile and Colombia. The bank possesses Strong risk management culture within the Canadian region while the business continues to emphasize on high levels of technology investment to support digital banking strategy to enhance its sales.

For FY20, the Management expects that the credit portfolio of the bank to remain strong; while due to improved organic growth and change in the bank’s business, provision for credit losses are expected to increase. However, the provision for credit losses in FY20 is anticipated to remain within the Bank’s risk appetite. Due to the outbreak of the coronavirus, we further expect the equity market is likely to feel the heat which might hinder the company’s investment and wealth management segments for a while.  Since most of the monetary authorities are going for lower interest rates and quantitative easing, that might put pressure on the bank’s net interest margin in the near term, but also opens up an opportunity for the bank to expand its loan book in the medium term.  We further believe that a strong labor market and strong population growth within Canada might lead to continued expansion in retail and commercial lending for the company.  The bank possesses strong capital levels which should bode well in challenging conditions.

Key Valuation Metrics (Source: Thomson Reuters) 

Valuation Methodology: Price to Book (P/BV) Based Relative Valuation

Price to Book Based Relative Valuation (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months 

Stock Recommendation: The stock of BNS closed at CAD 59.19 with a market capitalization of CAD 71.81 billion. The stock made a 52-week low and high of CAD 48.92 and CAD 76.75 and is currently trading close to the lower band of its 52-week’s trading range. BNS stock registered a sharp reversal trend on daily price chart on March 13, 2020, as stock recovered ~16% to CAD 59.31 in intraday. Also, leading technical trends 14-day and 9-day Relative Strength Index recovered to neutral zone from steep oversold zone, which is favorable for the stock.  Also, at the closing price of March 13, 2020, its shares were offering a lucrative dividend yield of 7.11% which is significantly higher against its benchmark index TSX 60 index’s dividend yield of 4.35%. The business showed a balanced performance during the first quarter of FY20 and delivered solid results across all the businesses segments and maintained a strong asset quality. We have valued the stock using Price to Book based relative valuation method. For this, we have considered peers like JPMorgan Chase & Co (TO: JPM), Royal Bank of Canada (TO: RY), Toronto-Dominion Bank (TO: TD), etc., and arrived at a target price which is offering a lower double-digit upside (in % terms).  Hence, we give a ‘Buy’ recommendation on the stock at the closing price of CAD 59.19, up 16.83% as on 13^th March 2020.

BNS Daily Technical Chart (Source: Thomson Reuters)

Disclaimer

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