RBC Capital Markets, 1 March 2006
BNS reports Q1/06 earnings on March 3. We are looking for cash EPS of $0.86 versus the Thomson First Call mean estimate of $0.82.
Investment Opinion
• Expecting BNS to Beat Consensus. Our Q106 estimate would drive 11% YoY growth. We have factored revenue growth at +10% YoY, still up +9% excluding securities gains. Last quarter the bank delivered +11% core revenue growth, and +13% excluding the drag of foreign exchange translation. However, investors were spooked in Q405 by Scotia’s indicated earnings miss after excluding $0.03 for a general loan loss release and ~$0.03 for higher-than-run-rate securities gains. The apparent EPS miss was largely owing to a Q4 expense bulge that we believe related to year-end accruals, and which we believe are unlikely to repeat in Q106. For example, BNS expensed a large investment in product capacity for its Scotia Inverlat operation in Mexico, pre-paid certain 2006 marketing expense items to save costs, and boosted its litigation reserves for which we are not aware of any unusual items forthcoming.
• Credit Expected Steady. We are forecasting a $107MM (normalized) loan loss provision (0.23% of L&A) this quarter, compared to $81MM (normalized, $36MM reported including a general reserve release) in Q05 and $74MM a year ago. Last quarter, the normalized LLP was roughly in line with expectations. We modeled a modest decline in gross impaired loans to $1.8B, indicating a continued stable trend. The coverage ratio is expected to remain essentially flat sequentially at 146%, and remains below the group average of ~164% this quarter (excluding TD).
• Above-Consensus Outlook for 2006/2007. For the full year 2006, we are carrying a well-above-consensus EPS outlook for BNS. Our $3.51 EPS estimate for 2006 is 3% above 2006 consensus, while our $3.92 estimate for 2007 is 7% higher than consensus. Our thesis is that BNS will manage loan losses in the range of 0.22% of loans in 2006, and 0.30% in 2007, below and better than consensus, some 10% higher on loan losses.
• 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 $2.8B 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 indicated at ~2.9x our projected book value of $17.68 (as at Oct. 31/06).
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BNS reports Q1/06 earnings on March 3. We are looking for cash EPS of $0.86 versus the Thomson First Call mean estimate of $0.82.
Investment Opinion
• Expecting BNS to Beat Consensus. Our Q106 estimate would drive 11% YoY growth. We have factored revenue growth at +10% YoY, still up +9% excluding securities gains. Last quarter the bank delivered +11% core revenue growth, and +13% excluding the drag of foreign exchange translation. However, investors were spooked in Q405 by Scotia’s indicated earnings miss after excluding $0.03 for a general loan loss release and ~$0.03 for higher-than-run-rate securities gains. The apparent EPS miss was largely owing to a Q4 expense bulge that we believe related to year-end accruals, and which we believe are unlikely to repeat in Q106. For example, BNS expensed a large investment in product capacity for its Scotia Inverlat operation in Mexico, pre-paid certain 2006 marketing expense items to save costs, and boosted its litigation reserves for which we are not aware of any unusual items forthcoming.
• Credit Expected Steady. We are forecasting a $107MM (normalized) loan loss provision (0.23% of L&A) this quarter, compared to $81MM (normalized, $36MM reported including a general reserve release) in Q05 and $74MM a year ago. Last quarter, the normalized LLP was roughly in line with expectations. We modeled a modest decline in gross impaired loans to $1.8B, indicating a continued stable trend. The coverage ratio is expected to remain essentially flat sequentially at 146%, and remains below the group average of ~164% this quarter (excluding TD).
• Above-Consensus Outlook for 2006/2007. For the full year 2006, we are carrying a well-above-consensus EPS outlook for BNS. Our $3.51 EPS estimate for 2006 is 3% above 2006 consensus, while our $3.92 estimate for 2007 is 7% higher than consensus. Our thesis is that BNS will manage loan losses in the range of 0.22% of loans in 2006, and 0.30% in 2007, below and better than consensus, some 10% higher on loan losses.
• 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 $2.8B 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 indicated at ~2.9x our projected book value of $17.68 (as at Oct. 31/06).
