Scotiabank: Collect A 6.7% Yield While This Turnaround Takes Form

seekingalpha05-02

Bank of Nova Scotia offers an attractive dividend and trades at a cheap price-to-earnings multiple based on 2025's expected earnings.The new CEO's ambitious turnaround plan focuses on operations in ...

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Form\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-02 21:01 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4688426-bank-of-nova-scotia-collect-a-6-7-percent-yield-while-this-turnaround-takes-form><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Bank of Nova Scotia offers an attractive dividend and trades at a cheap price-to-earnings multiple based on 2025's expected earnings.The new CEO's ambitious turnaround plan focuses on operations in ...</p>\n\n<a href=\"https://seekingalpha.com/article/4688426-bank-of-nova-scotia-collect-a-6-7-percent-yield-while-this-turnaround-takes-form\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU1201861249.SGD","symbol_name":"Natixis Harris Associates US Equity PA 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2025's expected earnings.The new CEO's ambitious turnaround plan focuses on operations in Canada, the United States, and Mexico, and aims to improve productivity and grow capital light businesses.Scotiabank's underperformance in the last decade is attributed to poor sentiment surrounding Latin American markets and the depreciation of currencies against the Canadian Dollar.   Redfox_Ca Bank of Nova Scotia (TSX:BNS:CA)(NYSE:BNS) offers an attractive dividend, trades at a cheap price-to-earnings multiple based on 2025's expected earnings, and has additional upside if the new CEO can execute an ambitious turnaround plan. (All numbers in Canadian Dollars unless otherwise noted) Introduction Bank of Nova Scotia (or as it's commonly referred to, Scotiabank) is a member of Canada's so-called \"big six\" banking oligarchy which, collectively, controls approximately 93% of banking assets in the country. It began in Halifax, Nova Scotia, back in 1832. A group of merchants met to discuss the need for a \"public bank\" to compete against the privately owned Halifax Banking Company. It opened for business on August 29th, 1832 and the company paid its first dividend to shareholders just over a year later, in 1833. This makes Scotiabank one of the oldest financial institutions in the world, predating Royal Bank of Canada (RY)(RY:CA) (it was founded in 1864), HSBC (HSBC) (which was founded in 1865) or Wells Fargo (WFC) (founded in 1852). Scotiabank opened in New Brunswick in 1874 and then Manitoba in 1882. It expanded across Canada by the early-1900s and debuted on the Toronto Stock Exchange in 1919. It also has a long history of operations outside of Canada, opening branch offices in Jamaica (1889), Cuba (1906), Puerto Rico (1910), and the Dominican Republic (1920). Scotiabank entered the Latin American market in a big way in the 1990s through a series of acquisitions. It entered Chile in 1990 and bought a controlling interest in Banco Sud American in 1999. It bought assets in El Salvador and entered Peru in 1997. It acquired a controlling interest in Grupo Financiero Inverlat, Mexico's fourth-largest financial group, in 2000. It continued to expand in Latin America, specifically with the acquisition of Royal Bank of Scotland's wholesale banking operations in Colombia in 2010. As it stands today, Scotiabank is a diverse financial services company with operations in Canada, the United States, Mexico, and throughout Latin America and the Caribbean. Approximately half its 2023 earnings came from Canada, with the rest generated by its various operations around the world.   Scotiabank 2023 annual report The company is split into four divisions -- Canadian banking, International Banking, Wealth Management, and Global Banking and Markets. The company's Canadian operations includes 947 branches and 3,703 automated banking machines, including the self-directed internet banking solution Tangerine. It has more than 11 million customers in Canada. Its international division has more than 12 million retail, corporate, and commercial clients. It is spread throughout Latin America and the Caribbean with the largest operations in Mexico, Chile, Peru, and Colombia. It offers everything from deposits to credit cards to mortgages to these clients. The Wealth Management division provides investment and financial planning advice to some 2 million clients across 13 different countries -- mostly in the same locations as Scotia's banking operations. This part of the business has more than $600B in assets under administration. Finally, Scotiabank has a Global Banking and Markets division, which provides investment banking services, lending and transaction services, and access to capital markets. Here's a breakdown of each division's profitability. From the 2023 annual report:   2023 annual report Recent developments Scotiabank's 20-year performance has been pretty solid, but when we do a little digging, we see most of the heavy lifting was done in the first decade of that period. From 2004 through 2014 Scotiabank's shares grew pretty nicely. Combine that with the company's dividend and the stock delivered solid returns, even though shares stumbled pretty badly throughout the financial crisis. The last decade has been significantly worse, with shares essentially flat over the period. The only return investors got was from the dividend. Here's a 20-year (price only) chart to demonstrate the difference in the two decades. Seeking Alpha  So what changed? Why did the stock do so well from 2004-14 and not nearly as well over the next decade? A big reason for the discrepancy is investors' attitude towards developing markets. In the early 2010s, many developing markets were performing well. Oil was strong, which encouraged investors to look at emerging economies with energy production, like Colombia or Brazil. Precious metals were also doing well, which was bullish for Chile's economy. And China's overall economic growth continued, so investors were bullish on its market as well. Developing markets have significantly underperformed since. MSCI's Emerging Market Index is up just 2.95% annualized (through March 31st, 2024) over the last decade, significantly under its 7.57% annual return since December 29th, 2000. Part of this is strength in the U.S. Dollar, along with investors getting excellent returns in American stocks. Why invest in emerging markets when local returns have been so strong? But a big chunk has simply been tepid economic numbers from a bunch of prominent emerging markets. Gold and other precious metals entered a multi-year bear market. Oil declined so far it was briefly negative in 2020. The Russian stock market was shut to outsiders after it invaded Ukraine. And China had its own set of economic problems after COVID-19. These factors all contributed to weaker economic numbers from the developing world. In short, poor sentiment surrounding Latin American markets has been a big reason for Scotiabank's lackluster results over the last decade. Investors sold Scotia because they preferred competitors like Royal Bank and TD Bank, which expanded more into the United States during that period. These economies also saw their currencies depreciate against the Canadian Dollar, which depressed local profits when converted back to Scotiabank's reporting currency. Frustrated by this phenomenon for years, Scotiabank finally took a serious look at its emerging markets assets in 2023. A new CEO was brought in to turn the ship around, and about six months after he was hired he presented a detailed turnaround plan, which included plans to:  Focus on operations in Canada, United States, and Mexico Grow capital light businesses such as wealth management Improve productivity Turnaround or exit operations in Colombia and Central America  This slide summarizes the company's new focus nicely: Investor day presentation Ultimately, I am bullish on Scotiabank's new plan. Although I'm loath to sell the Colombian assets at what could be a bottom, I do like the focus on the North American markets. These are Scotiabank's best assets, and it makes sense to switch focus to these markets if investors aren't giving the company any credit for the Latin American assets anyway. The focus is on businesses that will improve the company's return on equity, which is a key measure Canadian bank investors track. That's a smart strategy. Valuation Scotiabank is among the cheapest of Canada's six-largest banks when we look at a few different metrics. Let's start with the basics -- price to earnings. Since Canada's largest banks are projected to set aside additional sums for loan loss reserves in 2024 -- which would impact the bottom line -- let's look at the sector's valuation using 2025's expected analyst earnings targets.   Bank of Montreal (BMO:CA) trades for 9.8x 2025's projected earnings   CIBC (CM:CA) trades for 9.0x 2025's projected earnings   National Bank of Canada (NA:CA) trades for 10.8x 2025's projected earnings   Royal Bank of Canada (RY:CA) trades for 11.0x 2025's projected earnings   TD Bank (TD:CA) trades for 9.7x 2025's projected earnings   Scotiabank trades for 8.9x 2025's projected earnings   Next up is price to book value. Scotiabank is the cheapest among its peers there as well, with the stock trading at 1.11x book value. The next closest is Bank of Montreal, which trades at 1.21x book value. Scotiabank has pretty consistently been among the cheapest banks in Canada using this metric. Data by YCharts Finally, Bank of Nova Scotia is cheap based on its dividend yield, which is the highest among its peers. In fact, the company's dividend is a whole percentage point higher than its nearest peer, which is CIBC and its 5.5% yield. Data by YCharts Combined, these metrics paint a pretty convincing picture that Scotiabank shares are cheap. Risks Scotiabank is an unloved Canadian bank at the beginning of an ambitious turnaround plan. There are certainly risks here. The big one is the price the company will get for the unwanted LATAM assets. Emerging markets have been in the dumps for a decade now, and any potential buyer can see how Scotiabank's exposure to these markets was a negative for the share price. It's not really an environment a seller would want to be in. On the other hand, it could be as simple as addition via subtraction, and investors will cheer any sale price. Another risk is general Canadian economic conditions. High interest rates have hurt Canadian borrowers, and Canada's lenders have a lot of mortgages that need renewing in 2025 and 2026. Scotiabank has also lent heavily in expensive Canadian cities like Toronto and Vancouver. Q1 investor presentation The large amount of variable rate mortgages coming due in 2026 and 2027 could be a big issue if interest rates remain elevated. The bottom line I am is a big fan of Scotia's turnaround plan. The previous CEO patiently waited for the Latin American part of the company to come into favour again, but it just didn't happen. It took a new CEO to come in and look at the business objectively to make the decision to sell the worst assets and de-emphasize the rest. There's risk in selling these unwanted assets, but ultimately, I think investors will cheer the move away from markets like Colombia. Once they actually happen, that is. Now the company has to move from promising to actually delivering -- which will take time. Scotiabank is cheaper than its peers because of these assets investors don't like. As it dumps these underperforming parts of the business, the remaining assets will likely get a higher multiple. This alone should be enough to fuel some share price appreciation, which would be a welcome change for long-suffering investors. It would also be free to invest the proceeds from the sale into the preferred parts of the company, which could help jump start growth. Combine that with Scotia's generous 6.7% dividend yield, and it should be enough to generate solid returns. The only problem is, we don't really have a timeline for any of these asset sales to happen. It could take years for this turnaround plan to really start happening, depending on the appetite for Scotia's unwanted assets. So investors will have to be patient and give management time to execute.  Scotiabank is a core position in my portfolio, although I'm not adding more today. I'd like to see more progress on the turnaround before adding. 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