Scotiabank: Plunge In Oil Prices Results In Undervalued Bank Stock

| About: The Bank (BNS)

Summary

Oil Prices drags Scotiabank's stock down.

Scotiabank has steadily increased dividends.

Low valuations makes Scotiabank a value play.

Click to enlarge

The drop in oil prices have significantly affected the Canadian markets. The TSX index has dropped over 16% since April of 2015. Along with the drop in oil prices, stocks of blue-chip companies have not fared well. Canadian Imperial Bank of Commerce's (NYSE:CM) stock has dropped 18.95% and The Bank of Nova Scotia's (NYSE:BNS) stock has also dropped 12.10%. Out of the big five banks in Canada (Canadian Imperial Bank of Commerce (CIBC), Bank of Nova Scotia (Scotiabank), Bank of Montreal (NYSE:BMO), Toronto Dominion Bank (NYSE:TD), and Royal Bank of Canada (NYSE:RBC)), Scotiabank had the biggest drop (-14%) in the past six months.

Fundamentally Undervalued

As a follower of the value investment process, I prefer to focus on fundamentals of a company. In this case, Scotiabank. Scotiabank is one of the five big banks in Canada. Scotiabank serves over 20 million customers in over 55 different countries. Scotiabank also has a market capitalization of $65 billion. The bank currently trades at a price-to-earnings ratio of 9, which is lower than the five year average. The current price-to-book value ratio is 1.3, which is under the five year average of 1.9. The P/B ratio is also under the average of the TSX index. The price-to-cash flow ratio is currently 2.5, under the five year average of 412.5. In addition to the low valuations, Scotiabank has a dividend yield of 5%, above the five year average of 4.1%. The dividend yield has been steadily increasing for the past five years. The increase in the dividends and low valuations reveals that Scotiabank is undervalued.

Source: Scotiabank

Financials

Scotiabank has done well in terms of total net revenues (see chart below). For the past five years the net revenue has grown steadily, increasing every year. Scotiabank also has strong profit margins at 29.99%. Scotiabank reported higher than expected fourth-quarter earnings. Scotiabank had a payout ratio of 63% in 2015. The sales growth has increased from quarter to quarter by 6% due to the cost cutting measures introduced by management and its continued expansion into various regions across the world.

Click to enlarge Source: Morningstar.ca

Management

Scotiabank's management team has done a great job keeping the bank fundamentally strong, with low debt and continued profits from their business model. The Chief Executive Officer (Brian J. Porter) has considerable experience with running a Bank. Mr. Porter previously was the Chief Risk Officer as well as the head of international banking. As the Canadian economy declines, the experience of working in risk management will be beneficial. Also as the bank expands into Southern America, Mr. Porters experience working in International Banking will be beneficial. The current management staff has worked through the recession of 2008-09 and that experience will help them guide through this volatile period. The management team, in the past, have made strong decision such as investing $240 million in Thanachart Bank (OTCPK:THNUY) back in 2007. Now that investment is worth $2.4 billion.

Risks

Although Scotiabank's profit grew and the fourth quarter earnings painted a profitable picture, the results were propelled by one-time earnings from the adjustment in their pension plans. Other than the one-time earnings Scotiabanks earnings dropped. Scotiabank's loans on Oil and Gas also increased 72% in the last quarter. With the drop in oil prices, Scotiabansk loans have risen. Scotiabank was also caught in a gold fixing scandal, which could result in a substantial fine. The scandal could drive away investors from the stock. The scandal could nether its stock price.

Conclusion

The plunge in oil prices have forced the declines in the Canadian markets. Many blue-chip companies have suffered as a result. The drop in oil prices have resulted in many value investment opportunities. Scotiabank has low valuations and ratios such as the P/E ratio, P/B ratio, and the P/CF ratio. In addition Scotiabank has steadily hiked dividends for the last five years. Scotiabanks has steadily increased earnings, however the earnings were boosted by one-time events. The gold price fixing scandal can possible drag the stock price down.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BNS over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.