Friday, June 13, 2008

Citigroup Lowers Rating & Raises Target Price of Scotiabank

Citigroup, 13 June 2008

• Lower Rating to 2M Driven by Valuation — At nearly 3x book and 11.2x forward earnings estimates, BNS is trading at a significant premium to its peer group of Canadian banks. Historically, the share price has traded at a premium ranging from 2.5% to 9% based on book and 2% to 5% based on earnings. Currently, the bank is trading at a 20% premium to book and 11% to earnings.

• Raising Target Price to C$52 — We are raising the target price to C$52 from C$50 reflecting the slight reduction in capital costs. Similar to all financials, the bank’s funding costs increased as a result of the credit/liquidity crisis in the market, but as the market turbulence begins to subside funding costs are beginning to normalize.

• Valuation likely Reflects Geographic Diversification — The premium valuation/share price likely reflects the bank’s growth potential via geographic diversification. The bank operates in emerging markets where growth is anticipated to outpace that of the Canadian market. BNS is the most international of the Canadian banks.

• Price Performance Relative to Peers — Since our initial 1M Rating on 2/6/07, BNS share price has declined a little over 1%, compared to an over 13% decline for the Canadian peers and over 50% decline for comparable U.S. banks. On a total comparative return basis, BNS posted a nearly 13% favorable spread.
Financial Post, Duncan Mavin, 13 June 2008

It is a familiar picture: a bunch of big Canadian banks jostle for top spot in the local banking sector, a market effectively carved up by a handful of big players.

But the market is Jamaica, not Canada, and the new number one bank in the island is Canadian-owned, but it is certainly not a household name here.

According to data from Jamaica's central bank, the country's new market leader is National Commercial Bank, a subsidiary of AIC Limited, the Canadian mutual fund company owned by billionaire investor Michael Lee Chin.

Mr. Lee Chin's bank -- AIC bought 75% of it in 2002 -- overtook Bank of Nova Scotia to become the biggest bank in Jamaica by net assets during the first quarter of 2008, the central bank's data shows.

The two banks are more or less neck-and-neck in terms of net assets as of March 31 this year. The Jamaican unit of Scotiabank, which has extensive operations throughout the Caribbean, has net assets of about $19-billion Jamaican ($275-million) compared with about $20.7-billion Jamaican ($296-million) at NCB.

The next two largest banks are First Caribbean International Bank, which is a subsidiary of Canadian Imperial Bank of Commerce, and Royal Bank of Trinidad and Tobago, which was bought by Royal Bank of Canada in March for US$2.2-billion.

Last month, NCB's group managing director Patrick Hylton said the bank had made strides by focusing on customer service and innovation in marketing and back office functions. The bank reported that profit for the quarter ended March 31, 2008, grew 64% to $2.6-billion Jamaican ($37-million).

Scotiabank's Jamaican operations also saw profits jump sharply in the most recent quarter, up 40% from last year to $2.5-billion Jamaican ($36-million). Bill Clarke, head of the local Scotiabank unit, said the bank enjoyed solid growth across all business lines and strong demand for loans from retail customers.

Scotiabank has long had a successful business in the Caribbean. Canada's self-styled most international bank has 200 branches in the region. Scotiabank has had a presence in Jamaica since 1889, and now operates 38 branches across the country.

But the bank's executives are likely bracing for more competition since Canadian rivals recently bulked up in the region. In addition to Mr. Lee Chin's acquisition of 45-branch NCB five years ago, RBC's purchase of RBTT means it now has 130 branches across the Caribbean up from 46 before the deal which was announced last year.

In late 2006, CIBC also upped its investment in the Caribbean, taking up the $1-billion option to buy out Barclays PLC, the British bank that had been its partner in First Caribbean International Bank since 2002. CIBC now owns more than 90% of Barbados-based FCIB which has more than 100 branches.