Bank of Nova Scotia Is Worth Banking On - Barron's

| About: The Bank (BNS)

Bank of Nova Scotia (NYSE:BNS) has played it safe and smart, writes Barron's, largely avoiding the mistakes of U.S. peers. The bank is ready to shine when global markets start to recover.

Scotiabank, as it's called, is Canada's third-largest bank by assets. It has a market cap of $25B and a strong capital base, with a Tier 1 ratio of 9.3%. BNS has a strong domestic-banking business, provides a 6.4% dividend yield and boasts a diversified geographic base. It has raised its earnings and dividends consistently for more than a decade. Importantly, of the big Canadian banks, BNS is the least exposed to U.S. assets and holds no U.S. subprime residential debt. (Just 7% of BNS loans have been made to U.S. customers.) It doesn't need government aid and doesn't have to write down tens of billions of dollars on complicated financial instruments; for FY 2008, BNS charged off $822M of soured assets, mostly from Lehman's bankruptcy and CDOs unrelated to the subprime mess. FY 2009 charge-offs could be similar.

Even so, shares took a beating last year, losing around 50% from their 52-week highs. "Investors have convinced themselves that a bank is a bank is a bank," explains Dom Grestoni, a portfolio manager, and are worried loan losses will rise this year in countries like Mexico, Peru and Chile as the global economy worsens. CEO Rick Waugh admits there will be a "significant but manageable" increase in loan-loss provisions, but these are already incorporated into EPS guidance which is expected to rise 7-12% in 2009. Emerging markets may be slowing, Waugh says, but geographical diversity and high-quality loans ensure a "secure dividend." This global reach should help BNS when markets rebound; in FY '08, 58% of net income came from the bank's Canadian operations and the rest was from its international units.

Waugh also plans to whittle down the bank's productivity ratio to 58% from an already stingy 59%, a drop that could save "hundreds of millions." Portfolio manager Matt McCormick quips, "It's the kind of place that reuses paper clips," in explaining the low-risk frugal culture cultivated at BNS.

  • Colum McKinley, of Sionna Investment Managers, notes BNS is the only bank that Sionna rates as Overweight. Long-term, BNS could pick up Latin American market share at the expense of U.S. competitors.
  • Jackee Pratt, of Mavrix Fund Management, puts BNS' real value at roughly C$36, around 20% above its recent trading price in Toronto. (The NYSE-traded stock closed around $25 U.S. on Friday.)


  • In October, BNS agreed to pay C$2.3B for a 37.6% stake in CI Financial, Canada's number-three mutual fund company.
  • A global ranking of the financial sector places BNS among the top ten most stable banks in the world.
  • Peter Rozenberg of UBS maintained a Buy rating on BNS in January, with a 2009 target of around $47.