Scotiabank’s unique niche among big five banks

Scotiabank may not benefit as much from stronger U.S. economic growth than some of its peers, but this Canadian financial stock has good potential in emerging markets.

Shares of financial stock Bank of Nova Scotia (TSX—BNS) haven’t participated as strongly as those of Bank of Montreal (TSX—BMO), for instance, in the so-called Trump rally. BMO’s stock is up nearly 20 per cent from its November lows. Scotiabank, by contrast, has climbed just over 10 per cent since then.

Maybe that’s partly because Scotiabank doesn’t have the exposure to the U.S. that BMO does. Consequently, Scotiabank doesn’t stand to benefit as much as BMO from improving U.S. economic growth. But, over the longer term, Scotiabank is well positioned to benefit from the faster-growing emerging economies in which it has invested.

Bank of Nova Scotia is Canada’s third-largest bank by market capitalization. It considers itself Canada’s international bank because it’s not only a leading financial services provider in North America, but in Latin America, the Caribbean and Central America, and Asia-Pacific as well. The bank offers a broad range of advice, products and services to its 23 million customers, including personal and commercial banking, wealth management and private banking, corporate and investment banking, and capital markets.

Q1 results lag those of peers

From an earnings standpoint, the bank’s first-quarter results were not as strong as those of its peers, coming in just a penny more than analysts had expected. Nonetheless, the results were still strong.

For the three months ended January 31, 2017, Scotiabank made $2.0 billion compared to $1.8 billion in the same period of 2016. Adjusted earnings per share were $1.58, compared to $1.44 the year before.

Net income at the Canadian banking segment rose 12.1 per cent to $981 million, due to growth in net interest income, including a higher margin, and higher banking and wealth management revenues. The quarter also included a gain on the sale of real estate that contributed to an increase in net income of five per cent.

Net income attributable to equity holders at the international banking segment was $576 million, up 14 per cent, or 18 per cent adjusted for the impact of foreign currency translation. The increase reflected good retail loan and deposit growth, strong net interest margin and fee growth, and benefits from cost reduction initiatives.

With the release of its first-quarter results, Scotiabank announced a 2.7-per-cent increase in its quarterly dividend to $0.76 a share.

Scotiabank is unique among Canada’s big five banks in that it has substantial exposure to emerging markets through its international banking segment. This segment has generated momentum with record results in the first quarter. The bank says these results were underpinned by growth in its key Pacific Alliance countries—Chile, Columbia, Mexico and Peru. Management continues to see great potential in these countries, and if the bank does, indeed, deliver on that potential, the market could reward it by expanding the price-earnings multiple of its stock.

Scotiabank should earn $6.42 a share in fiscal 2017 (year ends October 31). The stock trades at 12.3 times that figure. The current annual dividend of $3.04 a share yields 3.9 per cent. Buy this Canadian bank stock for growth and income.

This is an edited version of an article that was originally published for subscribers in the April 21, 2017, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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