Scotiabank bets BIG on the Latin American region

BNS - Scotia Bank

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 the personal and commercial banking, wealth management, private banking, corporate and investment banking, and capital markets.

The bank has a presence across Canada (56% of 2018 revenues), the U.S. (7%), and Caribbean region (8%), the Pacific Alliance countries (21%) and international markets (8%) like Europe, Asia, Australia

Scotiabank operates through Canadian Banking (49% of 2018 earnings), International Banking (31%), Global Banking and Markets (20%) segments. The bank serves more than 10 million customers through a network of 963 branches and more than 3,600 automated banking machines in Canada. Its international banking serves more than 15 million retail, corporate, and commercial customers through more than 1,800 branches and well-established franchises.

As a leading financial services provider in the Americas, Scotiabank caters to more than 25 million customers and has assets worth $998 billion (as at October 2018).

Investment Data

Revenue Growth & Market Exposure

Scotiabank is diversified by business and geographies which reduces risk and volatility. The bank generates nearly 80% of its earnings from high quality and stable businesses which gives stability to its cash flows. The bank is poised to grow on the back of strong earnings momentum across personal, commercial and wealth businesses. It is further strengthening its core Canadian Banking franchise by the acquisition of Wealth Management businesses. With a rich history of 185 years, the bank has built a deep institutional knowledge base, leading-edge capabilities, and strong customer loyalties.

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 growth of 7% and 11% in digital adoption rate and digital retail sales, respectively, over the last two years, since it started its digital journey.

Mortgage growth, margin expansion, and productivity improvements should drive growth in the Canadian banking business, whereas its international banking business should benefit from strong fundamentals and economic growth potential in the Pacific Alliance countries. The bank has tremendous opportunities to expand its scale in Latin America and the U.S. which are prominent markets for the bank.

The bank is growing organically as well as through successful acquisitions as is evident by its strong track record of integrating businesses. It spent $7 billion in 2018 itself on business acquisitions, which have helped the bank grow its customer base, earnings, and increase its footprint in key markets. Scotiabank’s acquisition of BBVA Chile made it the third largest private bank in the country. The bank’s acquisition of MD Financial Management and Jarislowsky Fraser has strengthened its wealth and asset management businesses and helps in generating higher fees. The bank is also looking at divesting its non-core businesses to enhance its earnings and improve its risk profile.

Dividends

Scotiabank has been paying dividends every year since its foundation in 1832 and has increased them for 42 years. According to the bank’s website, it has the strongest Common Equity Tier 1 (CET1) ratio in its peer group at 11.1%, which provides capital deployment flexibility in the form of dividends disbursements and share buybacks. The bank has clocked an impressive dividend growth of 6.5% CAGR over the past five years.

The bank’s latest annual dividend hike was 8%. It has a target payout range of 40%-50%. Scotiabank sports a very attractive dividend yield of 4.9% and has a reasonable payout ratio of 51% currently. It returned $4 billion in dividends and repurchased more than 8 million shares for $0.6 billion in 2018. The bank has also grown its earnings at 7% CAGR over the past five years.

Scotiabank aims to keep its productivity ratio (expenses as a percentage of revenue) at less than 50%. The bank is targeting an income growth of 7%+ and 9%+ in its Canadian and international banking businesses, respectively over the medium term. It should keep increasing its dividend at the same pace in the future.

Competition

The Canadian personal and commercial banking segment is highly competitive. Scotiabank competes with other leading Canadian banks like TD Bank TSE:TD, Royal Bank TSE:RY, Bank of Montreal TSE:BMO, Canadian Imperial Bank of Commerce TSE:CM and National Bank TSE:NA. National Bank ranks amongst 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.

TickerCompanySectorIndustryScoreQuoteMarketCapPEFPEEPSYieldPayoutRatioPaymentsDividendChowderAmbassadorAchieverAristocratKingGraph
RYRoyal BankFinancial ServicesBanks62105.69151.6512.2011.698.663.8647.1144.0810.14NONOYESNO1
TDTD BankFinancial ServicesBanks6377.65142.0512.5211.326.203.8147.7442.9612.07NONOYESNO1
BNSScotia BankFinancial ServicesBanks7670.9885.7810.479.946.784.9051.3343.4810.40NONOYESNO1
BMOBank of MontrealFinancial ServicesBanks57100.8864.4410.6810.499.454.0843.6044.127.13NONOYESNO1
CMCIBCFinancial ServicesBanks88104.4546.459.168.6211.405.3649.1245.609.70NONOYESNO1
NANational BankFinancial ServicesBanks6963.3121.2210.3810.156.104.3044.5942.7210.45NONOYESNO1
CWBCanadian Western BankFinancial ServicesBanks7129.852.6010.339.432.893.6237.3741.088.77NONOYESNO1
LBLaurentian BankFinancial ServicesBanks6245.361.9210.8310.304.195.8263.0142.6410.73NOYESYESNO1
FNFirst National Financial CorporationFinancial ServicesBanks6531.311.8812.4211.502.526.0775.38121.909.22NONONONO1
EQBEquitable Group Inc.Financial ServicesBanks6273.021.227.446.299.811.7012.6441.249.70NONOYESNO1

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. Investments in technology, acquisitions, and geographic expansion have helped the bank to stay at the top of its game. A diversified exposure and increasing market share in high quality growth markets should drive future growth.

However, I find it tough to bet on Latin America as I do not understand the economical, business and political situation of those countries to see how Scotiabank can benefit in the short term. Due to their focus on developing business in the Pacific Alliance, I am inclined to stay on the sideline or hold it through a Dividend ETF such as FIE.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
Join 6,000+ Investors & Build a Winning Portfolio