Scotiabank (TSX: BNS, NYSE: BNS), formally known as The Bank of Nova Scotia, is one of Canada's Big Five banks - the third largest bank in Canada by assets (behind the Royal Bank Of Canada (RY) and Toronto-Dominion Bank (TD)), and the second largest by market capitalization (behind Royal Bank of Canada). It is also the country's most international bank, having over 1,850 branches in 48 countries. Unlike its competitor, Royal Bank of Canada, Scotiabank has avoided banking operations in the United States. Instead, it has built a network in the Caribbean, Central America, and Mexico.
Scotiabank, like the rest of the Canadian banks, was negatively affected by the 2008 Financial Crisis. For FY 2008, the bank wrote down 1,211m before taxes. Decline in Collateralized debt obligation (CDO) valuations led to $516 million in writedowns. BNS was also one of Lehman Brothers' creditors, so LEH's downfall cost BNS upwards of $120 million.
Despite BNS suffering writedowns of 1,211m from the 2008 Financial Crisis, the bank competes in a highly regulated Canadian banking sector that has limited Leverage and required conservative lending practices, which has left the Canadian Banks relatively unscathed. Canadian banks only accounted for 2% of the estimated 720 billion in writedowns by global banks and brokers during 2008. In fact, the Geneva-based World Economic Forum placed Canadian banks as the soundest in the world. Canadian banks average a Tier 1 Risk-based Capital Ratio of 9.8%, or twice that of the average American investment bank and three times greater than the mean of European commerical banks. The Canadian Government issued $75 billion in mortgage issuance to keep the international playing field level as other countries (especially the U.S. and European nations) provided guarantees to bank assets.
Second Quarter 2010 Results
Scotiabank reported second quarter net income of $1,097 million, up $225 million or 26% compared with the same period last year. Quarter over quarter, net income increased $109 million or 11%. Diluted earnings per share were $1.02 compared to $0.81 in the same period last year and $0.91 last quarter. Return on equity was 19.9% in the second quarter compared to 16.8% last year and 17.4% last quarter.
Scotiabank makes money by lending money for more than it pays to borrow it. The difference between the cost of borrowing and the revenue generated from loans is referred to as the Net Interest Rate Spread.
Non-interest income includes deposit and payment services, retail brokerage commissions and investment advisory fees. Trading revenues and investment banking revenues also fall into this category. Increasing Mergers and acquisitions (M&A) activity, higher trading volume, and expanding Assets Under Management (AUM) help boost non-interest income
BNS operates in three main business segments:
The Canadian Banking segment provides banking and investing products to more than 7 million customers in Canada. This segment is broken down into three divisions: Retail and Small Business Banking, Wealth Management, and Commercial Banking. Retail and Small Business Banking provides mortgages , loans, credit cards, and insurance products. Wealth Management provides retail brokerage, investment management, and mutual funds. Commercial Banking provides banking and lending products to medium and large businesses.
International Banking provides Scotiabank's commercial and retail banking products in more than 40 countries worldwide. International Banking has added over 90 branches (including 48 in Mexico) and has increased its presence in Peru, by increasing Scotiabank Peru ownership to 98% and acquiring 47.5% of Profuturo -- Peru's fourth-largest private pension fund.
Scotiabank is the 3rd largest bank in Peru and the 6th largest bank in both Mexico and Chile.
The Scotia Capital segment provides products ranging from corporate lending to equity sales, trading and research. Scotia Captial offers these services to North American consumers, as well as niche markets in Europe and Asia. The capital markets division of BNS focuses on Energy and Mining sectors.
During the 2008 Financial Crisis, BNS took hits in their equity and fixed-income markets. These declines were amplified by the Lehman Brothers (LEH) collapse, as BNS is one of Lehman Brothers' creditors. The Lehman collapse cost BNS $115 million in trading revenues. From Q3 2007 to Q3 2008, Scotiabank had written down C$899-million, representing 4.8% of its common equity, due to the 2007 Credit Crunch  Comparatively, Royal Bank has written down C$1.086-billion, representing 4% of its common equity, in that time period. Further, the fourth quarter was very volatile for the markets with equities, credit, foreign exchange and commodities all impacted. BNS lost $370 million due to their securities losing value and $110 million due to derivatives, which it hopes to hedge in three years.
Scotiabank economists predict the recession will last until 2011,, so BNS will make changes to prevent another $890 million hit, as it did in Q4. The bank has vowed to be more careful with giving loans, and as Scotiabank's chief risk officer claimed, "focus on credit, credit, credit." Also, Scotiabank plans to sell preferred shares to raise capital. However, BNS has more than $20 billion in exposure to the auto industry, which is plummeting.
With C$1.2b in writedowns during FY 2008, BNS's loss due to the financial crisis has been minimal compared to losses U.S. banks have suffered. Canadian banks as a whole have lost $11.7 billion due to subprime investments -- which is a fraction of the total that U.S. banks have lost. Further, the World Economic Forum published its survey of 12,000 corporate executives in October 2008, which showed that these company heads ranked Canadian banks as the soundest in the World; US banks ranked 40th on the list. Canada achieved a score of 6.8 (7.0 indicates a perfect score). In comparison, the US scored 4.0. Canadian banks have also profited from winning deposits and accounts as clients leave shaky U.S. banks.
Canada requires banks to maintain a tier-1 capital ratio of at least 7%. The ratio is a measure of equity and retained earnings to risk-adjusted assets and provides a general guide for determining a bank's financial health.
BNS had a Tier 1 capital ratio of 9.3% at the end of 2008. That compares with a ratio of 10.5% posted by Canadian Imperial Bank of Commerce (CM). BNS has the ability to easily issue about C$800 million ($648.8 million) in notes, adding about 30 basis points to its Tier 1 capital ratio.
Out of the big five Canadian banks (BNS, RY, BMO, TD, and CM), BNS is the only one that has not issued common equity this year. Canada has announced that the tier 1 requirements will increase to 10% to prevent a credit crisis. Royal Bank announced that it will issue as much as $2.3-billion in common equity to bring its Tier 1 capital ratio above 10%. Scotiabank must raise $2.255-billion to get to 10%.
BNS's business operations, as well as its ADR share prices are effected by fluctuations in the Canadian Dollar (CAD). A one percent change in the Canadian dollar against all other currencies in which the Bank operates (primarily the USD) leads to a C$174m increase, net of hedging, in unrealized foreign currency translation losses. On one hand, a rise in U.S. Dollar (USD) compared to the Canadian dollar translates to higher asset values of its American portfolio of loans, but also reduces the dividend paid on the ADR all else equal. Similarly, BNS's loans in Mexico increase in value if the Mexican Peso (MXN) strengthens relative to the Canadian Dollar (CAD). On the other hand, the Canadian economy is largely linked to exports of natural resources. As the the CAD depreciates, it boosts domestic revenue for Canadian resources. For instance, if oil trades for $50USD/bl, and the USD/CAD is 1, then a Canadian exporter receives $50CAD/bl for his oil. Now if the CAD depreciates 20% relative to the USD and oil does not move, he would then receive $60CAD/bl for the same oil; thus, improving his return. A weak Canadian dollar can boost the domestic economy and cushion the impact of falling natural resource prices. Therefore, Canada's economic health is dependent on the USD/CAD relationship.
Canadian Dollar/USD Conversion Rate
Data as of latest Quarterly/Annual Report December 24, 2008:
|Bank||Net Income (C$/Yr)||Assets (C$)||Market Cap (NYSE)||Yields (NYSE)||Branches||Tier 1 Capital Ratio||Employees||Customers||Forbes Global 2000 Rank|
|Royal Bank Of Canada (RY)||4.555B||723,859M||37.68B||7.2%||1741||9.00%||70,000||16,000,000||55|
|Bank of Nova Scotia (BNS)||3.140B||455,500M||24.57B||7.5%||9.30%||69,000||12,500,000||92|
|Bank Of Montreal (BMO) ||1.978B||152,687M||12.37B||9.4%||1280||9.77%||37,100||8,200,000||189|
|Toronto-Dominion Bank (TD)||3.813B||563,214M||26.92B||6.8%||2200||9.80%||52,000||10,000,000||95|
|Canadian Imperial Bank of Commerce (CM)||-2.060B||353,930M||1.86B||8.3%||1048||10.50%||40,457||11,000,000||159|
According to the Bank of Canada and a survey by the World Economic Forum, Canadian banks weathered the 2008 Financial Crisis better than peers in outside nations. Nevertheless, they are not immune. Between 2007 and as of quarter ended Oct 31 (4Q FY2008 for most banks), Canadian banks had written down C$16.17 billion compared to global banks and brokers having written down USD$720 billion. Canadian Imperial Bank of Commerce (CM) has written down the largest amount in 2008 at C$4.969 billion, while RBC made C$2.79 billion of writedowns as of December 2008. BNS took an after-tax writedown of C$595 million for its 4th quarter of fiscal year 2008. The remaining two of Canada's big five are not unschathed as well. Between the third quarter of 2007 and November 19, 2008, Bank Of Montreal (BMO) has written down C$899 million and Toronto-Dominion Bank (TD) C$65 million.
As Canada's third largest bank in terms of total assets and market capitalization, BNS is bigger than Bank Of Montreal (BMO) and Canadian Imperial Bank of Commerce (CM) but smaller than Toronto-Dominion Bank (TD) and Royal Bank Of Canada (RY). These five banks, all included in Forbes Top 200 Banks, dwarf the remaining 14 domestic banks in terms of market cap and assets; BNS is ranked 92nd.
BNS's operations are not limited to Canada. With 35% of 2008 revenue being generated outside Canada, BNS is Canada's most international bank. Scotiabank is 3rd largest bank in Peru and 6th largest bank in both Mexico and Chile. Scotiabank competes with Royal Bank Of Canada (RY) in the Caribbean market. BNS also competes against American Investment Banks, like Goldman Sachs Group (GS), for energy and mining Mergers and acquisitions (M&A) business.
Scotiabanks competes with wealth management divisions of the other big five as does it with large investment companies like Manulife Financial (MFC). In 2008, BNS was #4 in the Canadian mutual fund industry in net long-term fund sales, and as of July 2008, accounted for 3.22% of the mutual fund market.
|Competition||Bank of Nova Scotia (BNS)||Toronto-Dominion Bank (TD)||Bank Of Montreal (BMO)||Royal Bank Of Canada (RY)||Wells Fargo (WFC)||Bank of America (BAC)||Citigroup (C)
|2007 Market Cap $Mil||21,775.31||27,804.39||12,460.64||31,237.84||72,360.00||55,570.00||32,420.00|
|2007/Q308 Total Assets $Mil||416,963.18/416,963.18||462,623.98/462,623||341,743.47/341,743.47||594,577.78/594,577.78||575,442.00/622,361.00||1,715,746.00/1,831,177.00||2,187,631.00/2,050,131.00|
|2007/Q308 Net Income $Mil||2,579.20/258.74||3,148.43/832.90||1,642.73/459.99||4,623.66/919.97||8,057.00/1,637.00||14,982.00/1,177.00||3,617.00/-2,815.00|
|2007/Q308 Net Profit Margin %||33.33%/13.57%||24.32%/26.51%||20.11%/20.58%||25.08%/22.08%||20.45%/15.77%||22.59%/6.00%|| 4.78%/-21.09%
|2007/Q308 Operating Margin %||41.84%/13.65%||27.98%/27.06%||19.41%/18.84%||31.28%/30.52%||29.52%/22.81%||31.55%/7.70%|| 2.08%/-40.84%