Bank Of Nova Scotia: Earnings Did Not Disappoint
Summary
- Bank of Nova Scotia delivered on its first quarter earnings.
- The bank offers a good dividend at a good valuation.
- The bank does have exposure to the overpriced housing market within areas of Canada, but it has good capital.
- With the market fluctuating over trade war potential, BNS may provide entry points below $60.
I wrote recently about the consistency of Bank of Nova Scotia's (NYSE:BNS) financial performance. I also wrote about the very nice dividend yield. On February 27th, the bank reported its first quarter earnings results. It delivered on revenue, net income, and earnings applicable to shareholders. The bank continues to capitalize on Canadian, as well as international operations. Overall, I continue to think the stock offers a great addition to anyone seeking a stable investment for their portfolio.
Financials
Bank of Nova Scotia, or Scotiabank, delivered revenue growth of 3.2% year over year. Total revenues of a little over $7 billion were comprised of an 8% increase in net interest income of $3.9 billion, and a 2.2% pullback in non-interest income of $3.15 billion. The bank managed to bring down its non interest expenses by 5%, which helped grow net income by 16.3% to $2.3 billion. It all boils down to $2.25 billion in net income attributable to common shareholders. Regarding diluted earnings, that's $1.86 per share. That's roughly an 18.5% increase year over year.
Within Canadian operations, net income (attributable to shareholders) increased 12% to $1.102 billion. The bank noted the main cause being higher gains on interest income (not to mention lower taxes). Within international banking, incomes rose 16% to $667 million as the bank continues to develop its foreign businesses. Much of this is coming from their increased loans in South American markets. Interestingly enough, their "global banking" segment experienced a 3% decrease in income.
This quarter continues the company's consistent trend of financial success. Between 2013 and 2017, the bank increased revenues by 27% to $23.93 billion. Canadian banks, much like United States banks, stand to gain from rising rates bolstering their interest income. I would point out, however, that the severity of those rate hikes seems likely to be less extreme than some have thought. The Canadian economy grew slower than anticipated in the fourth quarter, which could dampen the government's willingness to adjust rates too much. While that isn't exactly what bankers want to hear, BNS is doing well anyway.
The one caveat that makes me nervous is the continuing discussion of mortgage irregularities. The United States knows far too well what a mortgage crisis can do to markets; principally banks. Much of the discussion seems to revolve around deals done at smaller banks, but we've all seen how those assets can find their way into larger financial institutions portfolios. It's also a fair argument that US tax reform will alter Canada's edge in terms of a place of investment by businesses. Nonetheless, Bank of Nova Scotia has operations in many parts of the globe, including the United States. It has a demonstrable trend of driving earnings and yields.
I love the stock and the 4.2% dividend. What I recommend keeping an eye on is the Canadian housing market. BNS has a lot of housing loans within the Toronto and Vancouver markets. It's something that the bank's own CEO has expressed concern over, since housing prices have skyrocketed to a level that won't likely be sustained. Still, this doesn't mean that the bank will come crashing down in the event of a correction. As far as I can tell in my research, Scotia Bank hasn't failed any big stress tests regarding mortgages.
Until the latest market correction, Bank of Nova Scotia stock was keeping pace with the S&P 500 over a two-year period. Frankly, the stock is more about the dividend than price appreciation. Throughout the last five years, the stock is only actually up around 4.5%. There are intermittent climbs and falls, but for the most part, BNS stock follows a consistent long-term range. Could that change if interest rates rise further in the coming years? It's very possible. But this stock through and through is about that dividend payout.
As a long, long, long-term investment, BNS has outpaced the S&P 500 by over 300%. This supports my thesis that this is a good one for retirement. I would actually look to take advantage of the current market volatility brought on by the "gloom and doom" rhetoric of a trade war. As markets get scared, Bank of Nova Scotia could offer another buy in point below $60.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.
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