Wednesday, May 30, 2007

Scotiabank Q2 2007 Earnings

Analysts' ratings and target prices for Scotiabank:

• BMO Capital Markets maintains "underperform," the target price has been raised raised to $55.00

• Blackmont Capital maintains "buy," the target price is $61.00. Blackmont's research report notes that Scotiabank's 2nd quarter EPS came-in 4¢ above its estimates of $1.03, due to better than expected revenue growth & lower loan loss provisions.

• Citigroup maintains a target price of $64.00

• Credit Suisse maintains "neutral," the 12 month target price has been raised from $57.00 to $58.00. Credit Suisse notes that Scotiabank has posted its 2Q EPS significantly ahead of the estimates and the consensus. Scotiabank's domestic retail operations generated robust earnings growth of 23% y/y in the quarter, marking a second successive quarter of better operating trends, the analysts add. Robust organic growth at the International division in the quarter was partly offset by normalized LLPs and an increased tax rate in Mexico, Credit Suisse says. The EPS estimates for 2007 and 2008 have been raised from $3.95 to $4.00 and from $4.30 to $4.35, respectively.

• Desjardins Securities maintains "top pick," the target price has been raised from $57.00 to $60.00

• Dundee Securities raised the target price from $58.00 to $62.00. Dundee noted that the core underlying earnings are in great shape, as revenue from capital markets did not make a major contribution to Scotiabank’s earnings.

• RBC Capital Markets maintains "sector perform," 12 month target price is $57.00

• TD Securities maintains "hold," 12 month target price is $57.00

• UBS maintains "buy," the target price has been raised from $61.00 to $63.00. UBS notes that Scotiabank posted its domestic results marginally ahead of expectations for the 2nd consecutive quarter. Scotiabank’s International division has the potential to deliver superior returns and growth over the medium term. Scotiabank also has room to either increase its dividend payout ratio or pursue a more active share buyback program going forward, UBS adds. The EPS estimates for 2007 and 2008 have been raised from $3.92 to $4.00 and from $4.35 to $4.45, respectively.
RBC Capital Markets, 30 May 2007

Investment Opinion

Core cash EPS of $1.02 were ahead of our $0.96 estimate and consensus of $0.95. We exclude 1.5 cents from reported EPS, representing the release of the general allowance for credit losses. Growth in core cash EPS versus Q2/06 was 14%, third best among the four banks that have reported so far. The quarterly dividend was raised from $0.42 to $0.45 - we had looked for an increase to $0.44. Our pre-tax income estimates were off by $116 million as revenue was $37 million (1.2%) higher than we had expected while provisions for credit losses of $20 million were $80 million lower than we expected (including a $25 million reversal of the general allowance). All three operating divisions came in ahead of our estimates, Scotia Capital driven by loan losses, Domestic and International banking by revenues.

We have increased our 2007E core cash EPS by $0.10 to $4.05 and our 2008E core cash EPS by $0.05 to $4.35. Higher expected revenues caused both years' forecasts to go up, while lower estimated loan losses also contributed in 2007. Our 12-month target price of $57 is unchanged.

We maintain our Sector Perform rating. Scotiabank's stock trades at 13.4x 2007E earnings, slightly above the Canadian peer average of 13.0x. Scotiabank holds the most excess capital of the Canadian group and has, in our mind, above-average medium- and long-term growth prospects compared to its peers due to its presence in Latin America and the Caribbean. However, domestic retail revenue and net income growth lags the leading banks', the bank is more exposed to normalizing business loan losses and Mexican operations are likely to be taxed at a higher rate and see higher loan losses in 2007 than in 2006. Our 12-month price target of $57 implies a forward P/E multiple of 13.1x, compared to the current multiple of 13.4x.
TD Securities, 30 May 2007


BNS reported operating EPS of $0.99, ahead of our estimate and consensus of $0.96 and $0.95, respectively. Headline results include a $25 million general reserve release (which we have excluded) and $51 million in net credit loss recoveries recorded in the investment bank (of which we have partly excluded in our operating number). Overall, we believe the bank reported solid results but caution investors in regards to the sustainability of BNS’s credit loss levels, particularly given the strong growth of their corporate and international loan books and what we view as the unsustainable level of recoveries. As expected, the bank announced a $0.03 dividend increase to $0.45.


Neutral. We are increasing our 2007 EPS estimate to $4.03 (from $3.93) to reflect better than expected Q2/07 results, and increased our 2008 estimate by $0.05 to $4.35. We are maintaining our Hold recommendation and $57.00 target price.
Bloomberg, Sean B. Pasternak, 29 May 2007

Bank of Nova Scotia, Canada's second- largest bank by assets, said profit rose for the 16th straight quarter, topping analysts' estimates, on higher fees from mutual funds and mortgages.

Net income climbed 16 percent to a record C$1.04 billion ($970 million), or C$1.03 a share, from C$894 million, or 89 cents, a year earlier, the Toronto-based bank said today in a statement. Revenue climbed 13 percent to C$3.21 billion.

Scotiabank said domestic banking profit surged 23 percent to C$367 million, the fourth Canadian bank to report higher earnings from consumer banking. The bank plans to open 35 new branches this year, introduced new loyalty programs and had record mutual fund sales in the first six months of fiscal 2007.

``On the consumer banking side, things seem fairly good with good growth, whether it's been residential lending or credit cards,'' said Juliette John, who helps manage about C$19 billion in assets at Bissett Investment Management in Calgary.

Shares rose 50 cents to C$54.25 in 4:10 p.m. trading on the Toronto Stock Exchange. The stock has risen 4.1 percent this year, compared with a 4.8 percent gain for the nine-member Standard & Poor's/TSX Banks Index.

Profit before one-time items was C$1.03 a share in the second-quarter, topping the 96-cent-a-share median estimate of nine analysts polled by Bloomberg.

Income from mutual fund sales rose 22 percent after the bank named Barbara Mason executive vice president of wealth management a year ago. Mason has said that fund sales from the bank's branches will double this year, and in April the firm hired former Royal Bank of Canada money managers John Varao, Shane Jones and John Kellett.

Mortgage assets soared 17 percent, and the bank said it gained market share in Canada, after it bought Maple Trust last year to expand in the high-risk mortgage market.

``Domestic results appear to be picking up momentum,'' UBS Canada analyst Jason Bilodeau wrote in a note to investors. Bilodeau said the bank beat his profit estimate by 3 cents a share.

Profit from the Scotia Capital investment bank rose 16 percent to a record C$320 million, led by higher brokerage and underwriting fees.

Scotia Capital ranked third for mergers advice involving Canadian companies, advising on five deals valued at $11.1 billion in the quarter. That compares with seven transactions worth $3.58 billion a year ago, according to data compiled by Bloomberg.

International banking profit climbed 10 percent to C$297 million, the slowest growth in at least five quarters, as expenses and loan losses rose. Chief Executive Officer Richard Waugh has spent about C$1 billion over the past two years adding to operations in Costa Rica, Jamaica and other regions where demand for banking services is growing faster than in Canada.

``Their unique international operations set them apart from the other Canadian banks,'' said Tom Kersting, an analyst at Edward Jones & Co. in St. Louis. ``While their growth may be a little lighter than some of the others, I think their longer- term growth prospects are pretty bright.''

Scotiabank set aside C$20 million for credit losses this quarter, compared with C$35 million in the year-earlier period.

The bank raised its quarterly dividend 3 cents, or 7.1 percent, to 45 cents a share, the second increase in three quarters.

Bank of Nova Scotia is the fourth lender to report earnings, and the third to top analysts' estimates. Bank of Montreal last week said earnings rose 3 percent to C$671 million, or C$1.29 a share. Toronto-Dominion Bank reported that profit climbed 19 percent to C$879 million, or C$1.20 a share. And Royal Bank of Canada said earnings rose 14 percent to C$1.28 billion, or 98 cents a share, missing analysts' estimates.

Canadian Imperial Bank of Commerce and National Bank of Canada, the fifth- and sixth-largest banks, are scheduled to report results May 31.

Scotiabank had C$411.7 billion in assets at the end of the quarter, surpassing Toronto-Dominion as the country's second- largest bank by assets. Royal Bank is Canada's largest bank by that measure.