Friday, December 01, 2006

BMO CM Downgrades Scotiabank

  
The Globe and Mail, 4 December 2006

Ian de Verteuil, analyst at BMO Nesbitt Burns Inc., has downgraded shares of Bank of Nova Scotia to "underperform" from "market perform."

Mr. de Verteuil points to Royal Bank of Canada as a good candidate for investors who want to switch from one bank stock to another (while suggesting they stay mindful of the tax implications of such a trade).

The analyst notes that Scotiabank, which is scheduled to report financial results on Friday, has an outstanding international franchise, but he says its domestic banking and wealth management businesses appear to have less momentum than those of some of its peers.

At the same time, Scotiabank stock has been trading at a premium to other bank stocks, and the analyst suspects that the shares won't be able to maintain that premium.

Mr. de Verteuil also lowered his 12-month target price for the shares to $50 from $51.
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Dow Jones Newswires, 1 December 2006

Bank of Nova Scotia's peers' 4Q results show trends that are "less than bullish" for the most international of Canada's banks, BMO Capital Markets says. Credit is at "inflection point" and there is "increasing gap" among competitors. Momentum at BNS domestic banking and wealth management businesses less than at peers, BMO says. Meanwhile, tax expenses at Mexico franchise to rise in 2007. "Without strong momentum in its International segment, BNS will be more dependent on the domestic business for growth," firm says, cutting BNS to underperform.
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BMO Capital Markets, 1 December 2006

We are downgrading Scotiabank shares to Underperform this morning. The shares have essentially performed in line with the group over the last 12 months (up 16% versus a 15% change for the Bank index). We are reducing our target price to $50 from $51 and believe that BNS shares are unlikely to maintain their premium to the group - or their premium to Royal Bank shares. We note that Scotiabank shares trade at 13.7x 2007 forecasted earnings while the group is at 13.1x and Royal Bank is at 13.3x. While the bank has an outstanding international franchise, its domestic banking and wealth management businesses appear to have less momentum than some of its peers.

So far, the three Canadian banks that have reported fourth quarter results have shown some trends that are less than bullish for Scotiabank - credit is stable, but appears to be at an inflection point and there is an increasing gap between the various domestic competitors. We also believe that given the higher tax expenses in Scotiabank Mexico in 2007, the International business will be challenged to deliver mid-teen earnings growth in the coming year. Without strong momentum in its International segment, BNS will be more dependent on the domestic business for growth.

Scotiabank continues to be a solid, well capitalized bank with an excellent track record and a seasoned management team. Retail investors who are considering switching BNS into another bank equity should consider the tax implications of such a trade.
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