Wednesday, March 05, 2008

Scotiabank Q1 2008 Earnings

RBC Capital Markets, 5 March 2008

Scotiabank's Q1/08 GAAP EPS of $0.82 were below our estimate of $1.05 and consensus of $1.00, primarily because of write-downs related to capital markets activities, although international and domestic banking were also below our expectations.

• If adding back the capital markets write-downs, EPS would have been $0.17 higher.

Lowering EPS estimates and target price

We maintain our Sector Perform rating but are lowering our 12-month target price per share by $1 to $49 to reflect lower estimated EPS.

• Our core cash 2008E EPS is down $0.10 to $4.20 while our 2009E core cash EPS is down $0.05 to $4.45, in large part reflecting higher estimated loan losses given rapidly deteriorating economic conditions in the U.S.

• Management is maintaining its diluted EPS growth objective of 7-12% which translates into approximately $4.30 to $4.50 per share. Our 2008 GAAP EPS estimate of $4.00 is below management's guidance, as is the case with most other banks.

• Our 12-month target price per share of $49 implies multiple compression from today's levels; from 2.5x to 2.3x on a P/BV basis.

• Scotiabank 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, and it is seemingly less exposed to headline risk in the near term. The bank's 10.9x 2008E P/E and 2.5x BV is at the high end of Canadian banks, which we believe caps potential expansion in relative valuation given its greater exposure to business lending and the rising Canadian dollar, while the domestic franchise lags the two leading banks' and credit headwinds are rising in Mexico, in our view.
Financial Post, Grant Surridge, 4 March 2008

Bank of Nova Scotia said on Tuesday its first-quarter earnings dropped 18%, due mainly to substantial volatility in global financial markets.

Bank of Nova Scotia's first quarter profit fell 18% to $835-million (82 cents per share) from a year earlier, the bank said on Tuesday.

"While we had anticipated the first quarter to be difficult, results were weaker than expected," stated chief executive Rick Waugh."This was due primarily to substantial volatility in global financial markets. Our exposure to these stressed markets is modest and well diversified, but our portfolios did experience some valuation writedowns."

The bank said it took charges of $158-million on its structured credit portfolio and $80-million on its swap exposure to a monoline insurer.

Analysts had expected Scotiabank to earn $1.01 a share before exceptional items, according to Reuters Estimates.

Provisions for credit losses, which are rising across Canada's bank sector after years of record lows, increased 23% to $91-million.

Scotiabank said net income at its domestic banking unit rose 1.7% to $367-million.

Profit at Scotiabank's international operations, which include businesses in the Caribbean, South America and Mexico, fell 10.7% to $282-million.

Profit at Scotia Capital, the group's investment banking and capital markets unit, slumped 36% to $187-million from a year earlier as trading revenue fell.

Scotiabank has targeted earnings per share growth of 7% to 12% in 2008.
The Globe and Mail, David Ebner, 5 March 2008

Roiled global credit markets helped drive down Bank of Nova Scotia's first-quarter profit by 18 per cent, but the bank said it was not hit as hard as its rivals and should be able to take advantage of the turbulence to make acquisitions.

"We are in a strong position to take advantage of opportunities that present themselves — opportunities that arise at uncertain times such as this," Rick Waugh, Scotiabank chief executive officer, told shareholders at the company's annual meeting yesterday in Edmonton.

In a session with reporters later, Mr. Waugh said Scotiabank, which has the broadest international focus among the domestic banks, would look to add to its assets in countries where it already operates. It has spent at least $2-billion on foreign acquisitions in the past two years. "It's more and more turning into a buyers' market," said Mr. Waugh, who left yesterday afternoon for several days of work in Brazil, one of the more than 40 countries in which the bank does business.

In the first quarter, Scotiabank profit fell to $835-million or 82 cents a share, down 18 per cent from $1.02-billion or $1.01 a year earlier. While Scotiabank's Canadian business posted a small gain to $367-million from $361-million, its investment brokerage, Scotia Capital, was hurt by what the bank called "unsettled" capital markets, seeing profit fall by roughly a third to $191-million from $296-million a year earlier. The bank's international business profit also fell, though less so, coming in at $282-million, down from $318-million, undercut by the higher Canadian dollar.

The first-quarter decline will "pose a challenge" for the bank, chief financial officer Luc Vanneste told shareholders, but added the company is maintaining its targets.

Analyst John Aiken of Dundee Securities Corp. said the bank's international business is a great long-term asset but "is also currently one of the areas of rising near-term concern," citing volatility, such as lower profits from Mexico. Mr. Aiken, in a report yesterday, added that concerns around Scotiabank are "nowhere near as severe as some of its peers."

Despite the lower profit, Mr. Waugh was upbeat yesterday, saying he was confident the bank's outlook was improving. "Crises do end and this one will," he told shareholders. Later, he told reporters that strong demand for the bank's various services and a steadier Canadian dollar are factors that underpin his confidence that the latter part of this year will be better for the bank.

In his address to shareholders, Mr. Waugh reiterated several themes he has promoted, led by the call for government endorsement of domestic bank mergers, as well as scrapping foreign ownership limits on Canadian banks.

Speaking with reporters, Mr. Waugh said he has always felt that domestic bank mergers are a matter of "when, not if," though he added that "when could be a very long time."

Mr. Waugh said the Canadian financial services business is competitive and broad — pointing to participants such as independent wealth management companies — and said he didn't feel competition is a fundamental issue in any debate over bank mergers.

Finally, at the annual meeting, one resolution on the "say-on-pay" question — where investors would have an advisory vote on executive pay — was supported by 39 per cent of those shareholders that voted. The result follows Canadian Imperial Bank of Commerce shareholders voting 45 per cent in favour of the same idea last week, and 42 per cent of Royal Bank of Canada investors doing the same.

Arthur Scace, Scotiabank chairman, appeared surprised by the result, telling shareholders the bank would now look at it again closely.