Bank of Nova Scotia

Bank of Nova Scotia (TSX: BNS) is a global financial services provider. The bank has five business segments: Canadian banking, international banking, global wealth management, global banking and markets, and other. The bank's international operations span numerous countries and are more concentrated in Central and South America.

Key highlights

• Strong earnings across diversified businesses: The bank's diverse businesses saw significant growth. Due to a robust growth in fee revenue, lesser provision for credit losses, and good asset and deposit growth, Canadian Banking earned CAD 931 million in net income, up 94%. International Banking earned CAD 429 million, representing a 165% increase, because of the Pacific Alliance's robust economic recovery. High revenue growth, positive operational leverage for the sixth consecutive quarter, and strong net sales helped Global Wealth Management segment earn CAD 378 million. In Global Banking and Markets, however, there was a 1% decline to CAD 517.

Source: Company

• Lower impaired loans: Gross impaired loans decreased to CAD 5,116 million as at April 30, 2021, from CAD 5,279 million last quarter. The decrease was due primarily to the impact of foreign currency translation and higher write-offs related to the International Banking retail portfolio driven by credit migration due to expired payment deferrals in Peru and Colombia.

• Strong capital position: Strong internal capital generation from retained earnings growth facilitated bank to improve its CET1 ratio to 12.3% in Q2 2021, +140 bps on Y-o-Y basis and +10 bps Q-o-Q basis.

• Lower provision for credit losses: The bank witnessed lower provision for credit losses at CAD 496 million, decreased by CAD 1,350 million or 73% compared to CAD 1,846 million in the previous corresponding period. The provision for credit losses ratio decreased 86 basis points to 33 basis points. The improvement was a result of improved market conditions and the more favorable macroeconomic outlook.

• Steady dividend distribution: The company has reported consistent dividend distribution, backed by stable financials. Recently, the bank declared a quarterly dividend of CAD 0.90 per share, payable on July 28, 2021. Moreover, at the last closing price, the stock was offering a dividend yield of ~4.4%, which is decent considering the current interest rate scenario.

Financial overview of Q2 2021

Source: Company

• In Q2 2021, the bank reported revenue of CAD 7,736 million compared to CAD 7,956 million, down 3%, due mainly to lower net interest income, partially offset by higher non-interest income.
• Net interest income stood at CAD 4,176 million in the reported period, decreased by CAD 241 million or 5% compared to CAD 4,417 million in pcp. The decrease was driven by the lower margins, partly offset by a higher contribution from asset/liability management activities.

• The bank minimized its provision for credit losses to CAD 496 million in the reported quarter compared to CAD 1,846 million in the previous corresponding period.
• On the back of the above-discussed points, the bank’s net income enhanced to CAD 2,456 million, against CAD 1,324 million in pcp.

Risks associated with investment

The COVID-19 pandemic has heightened risks of higher non-performing assets for FY2021. Further, a low-interest-rate environment and increased chances of loan default are likely to put pressure on the bank's performance, as the lower interest rate would drag NIM, and heightened uncertainties may lead to a rise in provisioning.

Valuation Methodology (Illustrative): Price to Book Value 

Stock recommendation

The bank posted another quarter of outstanding earnings, demonstrating the strength of its broad business platform as well as the good economic recovery in its key regions. In comparison to the previous year, adjusted net income grew by 81% to CAD 2,475 million, while return on equity climbed to 14.9% from 8.2%. The bank reduced its bad loans and credit loss provisions, which is a significant improvement that indicates the economic recovery. Furthermore, the bank's capital position continues to improve, with a CET1 ratio of 12.3%, indicating that it is well positioned for expansion. Therefore, based on the rationales discussed above and valuation, we recommend a "Hold" rating on the stock at the closing price of CAD 81.95 as on June 16, 2021. We have considered Bank of Montreal, Royal Bank of Canada, Canadian Imperial Bank of Commerce, etc., as the peer group for the comparison.

One-Year Price Chart (as on June 16, 2021). Analysis by Kalkine Group

Intact Financial Corporation

Intact Financial Corporation (TSX: IFC) is a property and casualty insurance company which provides written premiums in Canada.  The company distributes insurance under the Intact Insurance brand through a network of brokers and a wholly-owned subsidiary, BrokerLink, and directly to consumers through Belairdirect.

Key Highlights:

• Sale of Codan DK: Recently, the company reported the sale of its Codan Forsikring A/S's Danish business (Codan DK) to Alm. Brand A/S Group at a price consideration of CAD 2.52 billion. The above unit was jointly owned by Tryg A/S, and hence, IFC would receive 50% of the total proceeds from the sale. As per the Management, the group would utilize the above funds to repay short-term debt and general corporate purposes.

• RSA acquisition to support IFC’s expansion strategy: The group reported the completion of the acquisition of RSA Insurance Group PLC, which was announced in November 2020. This would bolster the company footprints in the Property and casualty (P&C) insurance segment across Canada and would mark the company’s presence in the United Kingdom and Ireland. Additionally, the acquisition would provide an increased customer base along with added product suite and specialized team. The group would be benefitted from better risk and claims management, which would further enhance the underwriting performance.

Q1FY21 Financial Highlights:

• IFC declared its quarterly result, wherein the company posted total revenue of CAD 3,050 million, came marginally higher than CAD 3,029 million in the previous corresponding period (pcp). The improvement was driven by slightly higher net earned premiums (CAD 2,777 million v/s CAD 2,766 million in Q1FY20).
• Income before income taxes surged to CAD 630 million, as compared to CAD 146 million in Q1FY20, due to a slide in net claims incurred (CAD 1,431 million v/s CAD 1,829 million in pcp), while a higher underwriting expense (CAD 956 million v/s CAD 890 million in Q1FY20) remained a drag.
• Net income attributable to shareholders was recorded at CAD 514 million, jumped from CAD 107 million in Q1FY20.
• Cash and cash equivalents were reported at CAD 1,062 million, while the company’s total assets were recorded at CAD 35,264 million.

Income Statement Highlights (Source: Company Report)

Risks: Increase in the total claims and underwriting expenses would dampen the company’s performance and would take a toll on the overall margins of the group.

Valuation Methodology (Illustrative): Price to Book Value

Stock Recommendation:

The group has adopted a conventional approach and has in-house asset management service, which has safeguarded its portfolio. Almost 68% of its financial assets have been allocated in the fixed-income segment, while 12% and 11% of the total assets were allocated towards cash and short-term notes and equity segments, respectively. Moreover, the Property and casualty (P&C) insurance industry is highly fragmented in Canada and offers ample scope for expansion. We have valued the stock using Price to book based relative valuation method and have arrived at a target upside of single-digit upside (in percentage terms). For the said purposes, we have considered peers like Royal Bank of Canada, National Bank of Canada etc. Hence, considering the above facts, we recommend a ‘Hold’ rating on the stock of IFC at the closing price of CAD 168.77 on June 16, 2021.

One-Year Technical Price Chart (as on June 16, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.