Friday, March 03, 2006

Scotiabank Q1 2006 Earnings

Scotiabank Targets More Baby Boomers

The Globe and Mail, Elizabeth Church, 4 March 2006

Winnipeg -- High trading revenue and lower provisions for loan losses helped Bank of Nova Scotia deliver a record first quarter, but the bank continues to make slow progress in its goal to grab a bigger share of the lucrative wealth management business in Canada.

Chief executive officer Richard Waugh has made no secret that he would dearly love to add to the bank's presence in this lucrative segment with an acquisition in Canada.

"We are not constrained by capital. We are just constrained by doing the right deal and finding the right partner," he said yesterday following the annual shareholders' meeting in his hometown of Winnipeg.

Canada's No. 3 bank by market capitalization has roughly $4-billion in excess capital and has the smallest share of the wealth management market among Canada's big banks.

Even without a deal, Mr. Waugh said Scotiabank will look for growth from within, focusing on its existing baby boomer clients who are using the competition to manage their investments.

It is looking to double the size of its financial consultant sales force and is aggressively promoting the bank with advertising and naming rights and opening new branches to get customers in the door.

During the annual meeting, Mr. Waugh singled out revenue growth as the bank's top priority and its top challenge.

In the first quarter, total revenue rose to $2.7-billion from $2.5-billion a year earlier, and income available to common shareholders was $844-million.

The results were higher than anticipated, but Royal Bank analyst Jamie Keating said that without the trading and securities gains and lower loan-loss provisions, the bank would have missed expectations.

"The consensus outlook for the balance of 2006 at $0.84 per quarter may edge down in reaction to these results, in our opinion," he said in a note to investors.

UBS analyst Jason Bilodeau said that given the bank's capital strength, international growth and high return on equity, Scotiabank "remains one of the strongest platforms of the group."
Scotiabank's first-quarter profits up 8 per cent; CEO eyes more acquisitions

Canadian Press, Michelle Macafee, 3 March 2006

Winnipeg (CP) - Scotiabank's failed expansion into Argentina was a "tragic" part of its history, but will not deter Canada's second-largest bank from making further acquisitions in Mexico, the Caribbean and Central and South America, chief executive Rick Waugh told shareholders Friday.

Waugh answered with an unequivocal "No way, Jose" when asked by a shareholder if the bank would go back to Argentina, where it is locked in a legal fight with the government to claim more than $600 million US it lost through its investment in former subsidiary Scotiabank Quilmes.

But he said the bank still sees opportunity in the region's growing, young population and its relatively low banking penetration, especially in Central America.

Waugh said the key to success lies in diversification and maintaining Scotiabank's reputation as a local bank with a long-term presence providing local products and services.

"As tragic as Argentina was, it did not threaten the future of this bank," said Waugh, a Winnipeg native who delighted in hosting the bank's first annual general meeting in the city in the institution's 174-year history.

"We're committed to stay (in the region) but we do have to deal with political risk. Argentina, unfortunately was an absolute anomaly but it's by staying in these countries that we deal with political risk."

Waugh later told reporters the bank's enthusiasm for new acquisitions will be limited to countries where it already has a presence rather than further broadening its turf.

Last December, the bank announced a $390-million deal giving it 80 per cent ownership of Peru's third-largest bank.

Scotiabank has operations in more than 40 countries in Latin America, the Caribbean and Asia, making it Canada's most international bank.

Their strong performances, particularly in Mexico, combined with a solid showing in the bank's domestic banking and investment division drove profits up eight per cent to $852 million in the first quarter of 2006, released Friday.

The Toronto-based bank said its earnings amounted to 84 cents per diluted share and compared to a profit of $788 million, 77 cents per share, in the year-earlier period. Analysts surveyed by Thomson Financial had looked on average for earnings of 82 cents per share in the quarter.

Total revenue grew to $2.8 billion from $2.6 billion in the comparable quarter of 2005.

"Really we saw a continuation of solid retail banking results from Scotiabank and good expense control," said Tom Kersting, a financial services analyst with brokerage Edward Jones.

Kersting said the results also help solidify the bank's position as the most efficient in Canada.

Shares in Scotiabank fell 49 cents to close at $47.25 on the Toronto Stock Exchange.

On the domestic front, Waugh said one of the bank's top priorities in the coming years will be to improve its wealth management business to reflect the needs of an ageing Canadian population more focused on investing than borrowing.

Scotiabank currently has the smallest wealth management platform among the country's biggest banks.

"We've got to do better," said Waugh. "We're not capital constrained, so we have to find the right opportunity that fits, but as we know there's not a lot of opportunity in Canada."

Kersting said such a shift is overdue.

"Scotia is a little behind some of the other banks when it comes to wealth management and asset management, so they do have some room for improvement there."

Kersting also expressed satisfaction that costs in Scotiabank's international banking segment were lower than last quarter.

Non-interest expenses totalled $452 million, down seven per cent, but still up 17 per cent from the same quarter last year.

The bank attributed the improvement primarily to Mexico, where it lowered marketing costs and staff bonuses.

The bank is also proceeding with its previously announced plan to add 20 Canadian branches by the end of this year, a first since 1998.

RBC Capital Markets, 3 March 2006

BNS reported Q1/06 cash EPS of $0.85 versus our estimate of $0.86 and the Thomson First Call mean estimate of $0.82.

Investment Opinion

BNS’ Q1 Not Clean - Moderately Negative. At $0.85 cash EPS the reported cash EPS notionally beat the $0.82 consensus and was in line with our RBCCM estimate at $0.86. A lower-than-expected loan loss at $75MM added ~$25MM pre-tax earnings or 2¢ EPS relative to the consensus credit loss expected. Also, trading and securities gains added about $70MM pre-tax or another $0.02 YoY, indicating in our judgment, that the underlying EPS at ~$0.81 otherwise missed the consensus expectation by 1¢. The consensus outlook for the balance of 2006 at $0.84 per quarter may edge down in reaction to these results, in our opinion.

Weak ‘Underlying’ EPS Growth. Eliminating estimated after-tax benefit of YoY change in (i) loan losses, (ii) securities gains and (iii) trading revenue, BNS’ underlying earnings grew only 5%, below the 11% peer average and at the low end of Scotia’s 4-quarter trailing range of 5-10%. Expense growth was 7.2%, partly inflated by non-recurring items.

Strong Relative Revenue Growth. Normalized revenue grew 8% YoY, 2% below our expected level, but above the peer average of 4.5%. Excluding securities gains and trading revenue, Scotia grew revenue 5.7% to beat the peer average of 3.6%.

Domestic Retail Stalled, For Now. Domestic retail & wealth earnings were flat YoY and looked disappointing with only 3.3% YoY revenue growth versus 6.3% expense growth for operating leverage of -3%. Operating leverage declined on two non-core accounting adjustments (AcG-13 hedge mark-to-market and retiree stock-linked accruals) and other items. We are confident retail expense growth will normalize to Scotia’s naturally more disciplined course. On deteriorating retail product spreads we are less optimistic – BNS’ 3 bps decline looks like BMO.

Valuation. Our price target of $51.00 (unchanged) is set at 13x our 2007 cash EPS estimate of $3.92. Our target P/E is in line with the target P/E multiple for the group and slightly above Scotia’s five-year average discount of 2%. We believe Scotia’s excess capital position, estimated at $2.8 billion at the end of Q4, and fast-growing international growth platform offset its lower leverage to wealth and higher corporate loan exposure. Our price target is also indicated at ~2.9x our projected book value of $17.68 (as at Oct. 31/06).