Published by Ben Reynolds on August 30th, 2016
Bank of Nova Scotia (BNS) is the 3rd largest Canadian bank ranked by market cap.
- Bank of Nova Scotia’s market cap is $64 billion
- The Toronto-Dominion Bank’s market cap is $83 billion
- Royal Bank of Canada’s market cap is $94 billion
Bank of Nova Scotia’s financial metrics should immediately stand out for value-focused dividend investors. The company has a high dividend yield of 4.1% and a low price-to-earnings ratio of 12.3. This helps the company to rank highly using The 8 Rules of Dividend Investing.
Bank of Nova Scotia released its 3rd quarter results this morning. This article covers those results in detail.
Bank of Nova Scotia operates in 4 segments:
- Canadian Banking
- International Banking
- Global Banking & Markets
The Canadian Banking segment is the company’s largest. It generated $930 million in net profit in the company’s most recent quarter. The Canadian Banking segment provides Canada with retail, small business, commercial banking, and wealth management services. The segment has more than 10 million customers and 1,000 branches across Canada.
The International Banking segment is Bank of Nova Scotia’s second largest based on net profit. The segment generated $589 million in profit in the company’s most recent quarter. The International Banking segment provides retail and commercial banking services in South and Central America, the Caribbean, and Asia. The segment has around 2,000 branches and 13 million customers.
The Global Banking & Markets segment generated $421 million in net profit in Bank of Nova Scotia’s most recent quarter. The segment serves large institutional and government clients with wholesale banking and capital markets services, globally. Services include: Corporate lending, investment banking, trading and research, and commodities hedging.
The ‘Other’ segment is by far Bank of Nova Scotia’s smallest. It generated just $19 million in net profit in the most recent quarter. The segment is a ‘catch all’ that includes smaller operating units, business line elimination items, and other miscellaneous corporate items. Due to its small size relative to Bank of Nova Scotia, the Other segment will not be a primary focus of this article.
3rd Quarter Results
Bank of Nova Scotia posted favorable results in its most recent quarter. Earnings-per-share grew 6% versus the same quarter a year ago. Revenue grew even faster, up 8%.
In addition, the company increased its dividend by $0.02, from $0.74 per quarter to $0.76 per quarter – a 2.7% increases. This is the 2nd $0.02 dividend increase Bank of Nova Scotia has announced this year. The company’s dividend is up 6% versus the same quarter a year ago.
The image below gives an overview of positive results in the company’s 3rd quarter:
Source: Scotiabank Q3 Investor’s Presentation, slide 4
The company’s growth in the most recent quarter is in large part due to growth in deposits. Deposits grew 7% in the Canadian Banking segment versus the same quarter a year ago. The segment’s net interest margin also increased from 2.25% in the 3rd quarter of 2015 to 2.38% this quarter. Net interest margin is the difference between what a bank makes on its deposits and what it pays in interest to its customers; the higher the better.
The International Banking segment also showed growth:
- Net income increased 9%
- Loans increased 9%
- Deposits increased 15%
Net interest margin was virtually flat versus the same quarter a year ago.
The Global Banking & Markets segment showed the most growth.
- Net income increased 12%
- Net interest margin grew to 1.72%, up from 1.62%
- Loans up 16%
Future Growth Prospects
Bank of Nova Scotia will likely continue generating solid growth.
The potential for rising interest rates are a possible growth driver for the company. As interest rates rise, the company’s net interest margin should increase as well. The higher the net interest margin, the more profit Bank of Nova Scotia will generate.
And interest rates are expected to rise. The image below shows interest rate predictions from the Federal Reserve.
Source: Financial Times
If interest rates rise in the United States, they will likely rise in Canada as well. This is good news for Canadian Banks. With that said, rising rates will likely slow growth further, or cause declines in developed world economies. Cheap credit is an addiction that will take time to heal from.
Bank of Nova Scotia has another growth driver in addition to rising interest rates; its large exposure to international markets. Bank of Nova Scotia has more customers and branches internationally than it does in Canada. The company operates globally. Bank of Nova Scotia has focused extensively on South and Central America.
The economies of South and Central America are expected to grow faster than those of the United States and Canada. This will add another percentage point or two of returns to Bank of Nova Scotia versus a bank that focused solely on Canada (or the United States). The image below shows historical and expected future growth rates for relevant countries.
Source: Scotiabank Q3 Investor’s Presentation, slide 24
Valuation & Final Thoughts
Bank of Nova Scotia is a top tier bank. It is one of the 3 most dominant Canadian banks. The company has increasing looked to international markets for growth. With interest rates expected to rise in the future, the company has a built in catalyst for growth.
Bank of Nova Scotia is not trading for a lofty valuation. The company is currently trading for a price-to-earnings ratio of just 12.3.
Low valuations mean a stock can have a high dividend yield without having a dangerously high payout ratio. Bank of Nova Scotia has a payout ratio of just 50%. The company’s recent dividend increases, growth prospects, and reasonable payout ratio make it very likely the company will reward investors many more years of rising dividends.
Additionally, the company has a high dividend yield of 4.1%. Investors in the United States should check the effects of Canadian holdings on taxes before investing, as additional dividend taxes will likely be imposed for investors investing outside of retirement accounts.