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.