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The Bank of Nova Scotia: The Most International Canadian Bank
The Bank of Nova Scotia (BNS.TO), also called Scotiabank, is a Toronto, Canada-based bank holding company with nearly $670 billion of assets and more than 81,000 employees. Although not the biggest bank in Canada - Royal Bank of Canada (RY.TO) and Toronto-Dominion Bank (TD.TO) are larger - it is highly diversified geographically, with operations in over 55 nations. A theme adopted in 1979 says it all: “Scotiabank. Just around the corner. Right around the world.”
The Bank of Nova Scotia was established in Halifax in 1832 by a group of prominent local merchants. The company has grown steadily over the years, both by opening offices in new locales, as well as via acquisitions. Some of the businesses purchased over the years, including a London diamonds and gold dealer founded in 1671, predate Scotiabank.
In the late 1800s, the company began to expand operations beyond its strong base in the Maritime provinces of Canada, to the western portion of the nation, in cities like Winnipeg, as well as south of the 49th parallel, to Minneapolis and Chicago. Around that time, it also began establishing small presences in Puerto Rico and the Caribbean. In the twentieth century, a steady stream of investments in overseas banks in nations as far-flung as Argentina and Singapore vastly expanded Scotiabank’s reach.
There are good reasons for expanding beyond Canada’s borders. The company estimates real gross domestic product, or national output, for Canada and its neighbor to the south, the United States, will rise 1.7% and 2.0%, respectively, in 2013, and about 2.3% and 2.5% in 2014. In contrast, many of the developing nations in which Scotiabank has established a presence are expected to grow much more rapidly. For example, management looks for Peru to grow 6.0% and 5.5% this year and next; Colombia to grow 5.0% and 4.8%; Thailand to grow 4.0% and 4.2%.
As a result, Scotiabank’s international banking segment’s revenues advanced 21% in fiscal 2012, far exceeding its other business groups. (The company’s fiscal year ended October 31, 2012.) Operating expenses also ramped up, and the loan loss provision rose, with much of the increases related to recent acquisitions, including a 51% interest in Banco Colpatria in Colombia. In the year ahead, the international segment should continue to benefit from the attractive economic and demographic profiles of the nations in which it operates. Although there are risks to entering new markets, they should offer considerable potential for Scotiabank to make loans and sell financial services to consumers and businesses for many years to come.
In contrast, Scotiabank’s Canadian banking business’s revenues rose just under 5% in fiscal 2012, but the segment accounted for the largest portion (31%) of consolidated net income of the four operating groups (excluding treasury and corporate adjustments). ING Direct Canada, an online bank acquired last November, should make a positive contribution to results in fiscal 2013. But a slowdown in residential mortgage activity probably will continue to restrain the division’s profit growth in the year ahead.
Revenues in the company’s other two operating segments, Wealth Management and Global Banking and Markets (investment banking) rose 12.5% and 14.1%, respectively, in fiscal 2012, and accounted for 18% and 24% of operating profits. Both segments are vulnerable to market volatility. But the wealth management division should benefit from an acquisition of 51% of a pension fund company in Colombia and increased cross-selling of insurance products. Meanwhile, products and geographic diversification should help mitigate the effect of continued economic uncertainty on the Global Banking and Markets business.
In fiscal 2012, unusual positive items added $0.61 to Scotiabank’s reported earnings of $5.22 a share, without which operating results, adjusted for a switch from Canadian accounting standards to International Financial Reporting Standards, would have risen 8%. Management looks for fiscal 2013 operating results to advance at a 5%-10% pace.
For a more detailed evaluation of Bank of Nova Scotia’s earnings prospects, as well as our assessment of the stock, subscribers are encouraged to consult Value Line’s quarterly reports on the Canadian bank.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.