EUR 850.00 For Business Accounts Only

Morningstar | BNS Updated Star Rating from 28 Nov 2018

Narrow-moat Bank of Nova Scotia, or Scotiabank, reported okay fiscal fourth-quarter results. Results don’t change our fundamental long-term outlook for the bank. However, after making some adjustments to account for slowing growth in Canada and a potential turning in the real estate market, we are lowering our fair value estimate to CAD 77 per share from CAD 80. This also affects our fair value estimate for U.S. shares, which has dropped to $58 per share from $62. Overall, we are expecting a period of rising charge offs and lower revenue growth over the medium term, which depresses returns on tangible equity. By 2022, we have Scotiabank returning to its current 17% level for returns on tangible equity.

Diluted earnings per share were CAD 6.82 for the year, up 5% from CAD 6.49 in fiscal 2017. There were several one-time items during the year, and adjusted diluted EPS was up 9% year over year, at CAD 7.11. Overall, revenue and expenses were well in line with our full-year estimates, and GAAP EPS was right in line with our estimate for CAD 6.82. The adjusted return on equity declined again for the quarter, to 14.1%. Again, this is back in line with our near-term projections. Operating leverage was positive for full-year results, coming in at 3.7%, and on an adjusted basis the bank generally met its medium-term financial objectives. Scotiabank also announced it has exited a number of noncore operations within the Caribbean. Given the bank’s broad reach across many geographies and products, we like the overall strategy of streamlining some of these operations and dropping noncore businesses.

Credit quality remained pristine, as PCL and NCO ratios were stable. Among peers, Scotiabank remains one of the least exposed to the Canadian real estate market. Scotiabank also provided updated disclosures around its energy related loan exposures, particularly those more directly tied to the WCS pricing structure. Overall, these loans make up 0.2% of total loans outstanding, with nearly 90% being investment-grade. This, along with the bank’s performance during the 2016 oil downturn gives us some confidence the bank will be fine during this latest round of pricing pressure within the industry.

Loan growth was strong for full-year results, with Canadian business loans up double digits, and total loans were up 5%. Residential mortgage growth in Canada was at 3% year over year, which seems to us to be a reasonable level. International loan growth was exceptional, with balances up 10% year over year, excluding the effects of M&A. This led to total balances being up 9.5% for full year results on an end of period basis.