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5 Years After the Crash – Bank of Nova Scotia is Charging into the Future

In Part 1 of our review of the Canadian banks since the crash, we had a look at the biggest of the bunch – the Royal Bank of Canada.  Today we turn to the Bank of Nova Scotia (TSX: BNS, NYSE:BNS), and how this bank withstood the crisis and has evolved since then.

The Bank of Nova Scotia, or Scotiabank, with total assets of $743 billion and a market capitalization of over $72 billion, is Canada’s most international bank.  With operations in more than 55 countries Scotiabank has better exposure to faster growing markets than any of its peers.

Over the past 5 years, as the regulatory environment for financial institutions has intensified, Scotia has increased its Tier 1 capital ratio to 13.6%, one of the highest of the Canadian banks, compared to a 9.3% ratio in 2008.  Its ROE stood at 16.7% in 2008, and has since increased to almost 20%.  As we can see from the following chart, the stock has performed exceptionally well, with a return of 109% since the lows of February 2009.

Scotiabank Stock Chart

Scotia chart

And this share price appreciation doesn’t even account for the sizeable dividends that the company has been paying out.  The current dividend is $0.60 per share, up from $0.49 per share in 2008.

Changes abound

These metrics aren’t the only things about Scotia that have changed.  As the table below indicates, Scotia’s efforts to bring more diversification to their business, both geographically and in terms of business segments have definitely taken hold.

                                                            Segmented Net Income

2008

2012

Canadian Banking

42.6%

31.0%

International Banking

29.3%

25.1%

Global Wealth Management

0.0%

18.3%

Global Banking & Markets

19.5%

23.9%

Let’s now take a closer look at each of these segments:

Canadian Banking

Similar to what Royal Bank has been doing, Scotiabank has been focusing on its global wealth management and capital markets divisions in order to further diversify the business.  In 2012, the Canadian Banking segment represented 31% of total net income, down significantly from 2008, when it accounted for almost 43% of net income.

Notwithstanding Scotiabank’s goal to focus on global wealth management and capital markets, they did not pass on the opportunity to purchase ING Direct Canada from its struggling parent ING Groep NV (NYSE: ING).  At the time of the acquisition, ING Direct had 1.8 million clients, $30 billion in retail deposits, and another $30 billion in loans, primarily mortgages.  Scotiabank paid $3.13 billion for these assets.  Scotia has said that the acquisition will be accretive right from the get go.

International Banking

The international segment has also been declining as a percent of total income even though in 2012, Scotia made its biggest ever international acquisition, a 51% stake in Columbia’s fifth largest bank, Banco Colpatria.  The bank’s strategy is to increase its exposure to faster growing markets such as Columbia.  While GDP growth in Canada and the U.S. is expected to be below 2% in 2013 and just over 2% in 2014, management expects Columbia to grow 5% and 4.8% in 2013 and 2014 respectively.  Other countries where Scotiabank has a presence include Peru, Brazil, China, and Thailand, all expected to grow at a much stronger rate than Canada.

Global Wealth Management

The Global Wealth Management segment increased to 18.4% of net income, as Scotia has stepped up its focus on this segment.  In 2011, Scotia bought Dundee Wealth, the top performing and best-selling independent wealth management group at that time in the Canadian marketplace, for $3.2 billion.

Global Banking and Markets

Lastly, the Global Banking and Markets segment, which offers corporate lending as well as equity and debt financing, increased to 24% of net income from 19.5% in 2008.  This segment is more volatile but can be extremely profitable.

Bottom Line

Scotiabank weathered the storm extremely well and has emerged with a forward looking strategy aimed at further diversification and repositioning itself in order to have more exposure to higher growth geographic areas as well as higher growth business segments.  To this end, the bank’s goal is to generate about half of its income from outside Canada over the medium term, and to, over time, have each of their business lines contribute approximately 20-30% of net income per year.

None of the Canadian banks made the cut in our special FREE report “5 Companies to Replace Your Canadian Index Fund”.  Click here now to learn which 5 Canadian superstars did – one of which just got taken out at a huge premium.

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Fool contributor Karen Thomas does not own shares in any of the companies mentioned above.  The Motley Fool does not own shares in any of the companies mentioned above. 

 

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