EUR 850.00 For Business Accounts Only

Morningstar | Scotiabank Needs to Prove That Its Acquisition Strategy Is Working

Bank of Nova Scotia is the third-largest Canadian-based bank by assets, and is one of six Canadian banks that collectively hold almost 90% of the nation's banking deposits. The bank is known as Canada’s most international bank as it derives half of its revenue from Canada, over 40% from international operations (primarily Latin America, namely Mexico, Peru, and Chile), and a single-digit percentage from the United States. Its domestic operations are more concentrated in mortgages and auto lending, with leading market share in autos. The bank has been expanding its domestic wealth operations significantly with its latest acquisitions of MD Financial and Jarislowsky Fraser, making it the third-largest active manager in Canada. The bank has also been making multiple acquisitions within its Latin America footprint as it attempts to consolidate better share within the area. The international exposure gives the bank the potential for higher growth and return opportunities compared with peers. However, it also opens the bank to more risks. While the Latin America region has been more stable in the past decade, there are risks that this may not continue. A return to political instability, higher credit losses, and inflation have higher likelihoods than for more mature markets.After numerous acquisitions, the bank is in the middle of rationalizing its many back-end systems and improving efficiency bankwide. By 2021 we believe the bank should be on the verge of breaking through a 50% efficiency ratio and overall should be one of the most efficient Canadian Banks on a bankwide basis. We also like the bank’s digital efforts. While all banks in Canada are engaged in similar ongoing investments, Bank of Nova Scotia has been spending the most on its technology and communication expenses. We think these efforts will ultimately pay off in the form of improved operating efficiency, customer engagement, and internal sales coordination. This leads us to believe that returns on tangible equity near 17% are sustainable over the longer term for the bank.