The top Canadian banks are successfully executing on their business plans, which is allowing them to create separate identities. Canadian Imperial Bank of Commerce (NYSE:CM) continues to reinforce its Canadian retail and business banking business while Toronto Dominion (NYSE:TD) continues its successful acquisition integration, which is positioning them as a North American banking leader. The Bank of Nova Scotia (NYSE:BNS), or Scotiabank has separated itself from the other top Canadian banks through continuous acquisition and growth in Latin America, Caribbean and some parts of Asia. As the North American retail and business banking market continues to fiercely fight for new customers and the retention of existing customers Scotiabank continues to make bold steps forward.
Scotiabank's operation can be defined through two channels, the first being its Canadian banking operation. The Canadian banking business provides a full line of financial advice and banking solutions for personal and business customers. Scotiabank recently acquired ING Direct, which has been rebranded to Tangerine Bank, which is an alternative for self-directed banking. Second, Scotiabank operates a significant international banking operation, which provides a full range of financial products, solutions, and advice to retail and commercial customers in select regions outside of Canada, which includes the Caribbean, South America and Asia.
Rates Expected to Remain Stable in Canada
The lack of traction in global economic growth is delaying sustainable growth in Canada's economy. Recently, the Bank of Canada issued new economic forecasts that raised inflation projection for 2014 but a serious concern is that Canada's economic growth forecasts have been cut with new projections that the economy will not return to full capacity until mid-2016. A large portion of Canada's economy is exports to the USA and Europe, which are still showing sluggish growth rates.
With interest rates expected to stay low in the midterm this is a strong sign that the Canadian economy neither is expected to grow at rapid rates and the thought of a serious economic challenge has evaporated. Low interest rates will continue to spur consumer and business spending which represents a stable outlook for the Canadian banks. Canadian banks, which historically have been viewed as strong dividend and income investments, have experienced a significant rally in their share price, which indicates that the market views the Canadian banks as growth stories. The rally has decreased dividend yields below their historical 4-5% yields, which indicate that the market is now buying Canadian banks on the basis of growth rather than income.
Scotiabank along with the other Canadian banks will continue to benefit from low interest rates within the domestic market, which will further drive profits, dividend distribution and provide capital for foreign expansion plans. Throughout Canada, Scotiabank currently services over 7.7million clients and business customers across Canada through a network of 1,190 branches and offices in addition to 3,869 automated banking machines. Scotiabank's alternative self-directed banking solution, Tangerine, services 1.9million customers.
Growing International Business through Strategic Acquisitions
Collectively as of 2013, Scotiabank services more than 21 million customers and has over $783 billion in assets. Globally, the bank employs more than 83,000 employees. Scotiabank is Canada's most international bank with 3,322 branches and offices in over 55 countries.
Scotiabank reported that second-quarter 2014 profit rose 14%, beating estimates and the bank's CEO gave clear indication that the bank is in a position to rapidly expand on its foreign business activities. The company is in growth mode and has stated that it will deploy capital to acquire and grow business rather than buy back shares. The primary area of focus is on expanding its presence in Colombia, Peru, Chile and Mexico. Historically and recently the company has been buying companies or positions in companies that are involved in personal and business banking along with wealth management companies. Beyond Central and South American countries, the company prides itself on developing the most extensive representation of any bank in the Caribbean region, with over 370 branches in 23 countries.
Here is a brief list of recent transactions, extracted from Scotiabank's website, which highlights the company's ability to fiercely expand through acquisition:
- Grupo Financiero Inverlat changes its name to Grupo Financiero Scotiabank Inverlat S.A. de C.V. (also known as Scotiabank Inverlat).
- Casa de Bolsa Inverlat changes its name to Scotia Inverlat Casa de Bolsa.
- Casa de Cambio Inverlat changes its name to (3) Scotia Inverlat Casa de Cambio.
- Banco Inverlat changes its name to (4) Scotiabank Inverlat.
- Banco Ahorromet Scotiabank S.A. is renamed Scotiabank El Salvador S.A. after Scotiabank increases ownership to 99.6%.
- Scotia Insurance de Puerto Rico is launched in November
- (1) Banco Sud Americano is re-branded as (2) Scotiabank Sud Americano.
- Scotiabank's ownership of Grupo Financiero Scotiabank Inverlat, S.A. de C.V. increases to 97%
- Scotiabank de Puerto Rico acquires Pan American Financial. Pan American has been active in the Puerto Rican mortgage industry since 1997, and is one of the leading originators of Federal Housing Association loans in the territory.
- Scotiabank acquires Corporation Interfin, Costa Rica's largest private bank, for $330 million
- Scotiabank purchases 80% of Banco Weise Sudameris (BWS) from Italy's Banco Intesa and also purchases 100% of Banco Sudamericano (BSA).
- Scotiabank acquires 24.99% of Thanachart Bank, Thailand's eighth-largest bank and leading automobile lender.
- Scotiabank acquires Montreal-based TradeFreedom
- Scotiabank signs an agreement to purchase E*TRADE Canada.
- Scotiabank acquires assets from Grupo Altas Cumbres in the Dominican Republic and Guatemala.
- Scotiabank expands in Peru by purchasing Banco del Trabajo.
- Scotiabank purchases 47.5% of ProFuturo AFP, Peru's fourth-largest private pension fund.
- Scotiabank creates a joint venture with Bank of Beijing in China.
- Scotiabank expands its operations in Guatemala by acquiring Banco de Antigua. Scotiabank increases its capital with an investment of US$7,000,000, turning Banco de Antigua into a more solid institution with higher expansion opportunities.
- Scotiabank announces the acquisition of a majority interest in Five Continents Financial Ltd. (FCFL), a leading global asset management company in the Cayman Islands.
- Scotiabank acquired ING Direct, which has been successfully rebranded to Tangerine,
- Scotiabank acquires 50% of BBVA pension fund management business in Peru
- Most recently, Scotiabank announced the 51% acquisition of Cencosud SA's financial service division in a transaction valued at $279 million, which would place Scotiabank as the third largest credit card provider in Chile. The acquisition will also give the bank a 15-year partnership deal that would allow them to administer the credit card business and expand its product offerings. Further, Scotiabank has also agreed to fund 100% of the company's loan assets. Cencosud is a major retailer in Latin America with 2.5 million credit cards in circulation with an estimated balance of $1.2 billion in outstanding credit card debt.
International Growth, Strong Profits, Healthy Dividends and Further Share Price Upside
Fundamentally, Scotiabank is extremely sound with second quarter 2014 results showing a net profit of CDN$1.66 billion compared with CDN$1.58 billion a year earlier. In parallel with its substantially strong earnings, the bank announced an increase in its dividend payable on outstanding common shares of $0.64 per share for the quarter ending July 31, 2014, or $2.56 on an annual basis. This is in comparison to $2.39 in 2013 representing a healthy 5% dividend increase year over year. This represents a dividend yield of around 3.5% based on recent trading levels.
With core fundaments in place, a strong cash position on the back of strong earnings Scotiabank is in a position to complete strategic foreign acquisitions as it has proven that it has the capability and capacity to make substantial purchases and strike strategic relationships. These transactions will take several years to be fully integrated and significantly impactful on the financial statements. This could indicate that Scotiabank still has a significant amount of growth in the next years to decade.
As Scotiabank continues to promote itself as an international bank, shareholders should adapt the same mentality and view Scotiabank as a banking growth story who is rapidly expanding beyond its stable Canadian business units. Scotiabank is very well positioned in global markets, flush with cash, redistributing profits back to shareholders while continuing to drive its international growth. Scotiabank is a good fit for any long-term investor who is seeking modest dividend payments, with an upside linked to international banking exposure.
Credit Suisse analyst Kevin Choquette has raised his price targets on all the major Canadian banks including Bank of Nova Scotia. Mr. Choquette rates Bank of Nova Scotia "outperform." He targets Scotiabank shares at CDN$84. Based on current trading levels of $74/share his targets represent an upside of around 15% plus a quarterly dividend, which by all accounts represents a healthy investment opportunity.
Disclosure: The author is long BNS. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.