Bank of Nova Scotia Earnings: Strong Performance in Domestic Banking

Key Morningstar Metrics for Bank of Nova Scotia

• Fair Value Estimate
  : C$92.00
• Morningstar Rating
  : ★★
• Morningstar Economic Moat Rating
  : Narrow
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Bank of Nova Scotia’s Earnings

Bank of Nova Scotia BNS reported strong fiscal second-quarter results, with adjusted net income growing 29% year over year, excluding divested businesses. The results translated into an adjusted return on equity of 13.2%, up 270 basis points year over year and below the medium-term target of 14%-plus.

Why it matters: Canadian banking led the way, with segment earnings up 53% year over year. Global wealth management and global banking and markets also delivered solid growth of 19% and 11%, respectively.

• The Canadian banking segment’s strong performance was driven by a 29% decline in provisioning and strong pretax preprovision profit growth of 13%. We note that the prior-year comparison was elevated due to a large performing provision, built from trade policy uncertainties.
• International banking remained a soft spot, with adjusted earnings up just 3% excluding divestitures. That said, profitability trends are improving, with the segment posting a return on equity of 16% in each of the past two quarters, in line with the bank’s medium-term target.

The bottom line: As we incorporate second-quarter results, we plan to increase our fair value estimate for narrow-moat Scotiabank by around a mid-teens percentage. We also plan to decrease our Uncertainty Rating to Low from Medium. We continue to view the shares as overvalued.

• The valuation increase is primarily driven by a reduction in our cost of equity assumption to 9.3% from 10.0%, reflecting an updated view of Scotiabank’s business mix and cyclicality.
• The Uncertainty Rating change reflects both qualitative and quantitative factors, including a more favorable assessment of domestic earnings quality.