Canaccord Financials -- Banks
Q1/13: INTERNATIONAL AND ING DIRECT SUPPORT STRONGER EPS GROWTH
Q1/13 core cash EPS was $1.27 (up 12% YoY) versus our estimate and consensus of $1.25. Revenue growth was better than expected, and PCLs came in lower than forecasted. The bank raised the quarterly dividend to $0.60 (5% QoQ and 9% YoY), higher than our estimate of $0.59.
International earnings were up 12% YoY, reflecting very strong operating leverage. Expense growth checked back to 15.5% YoY (0% QoQ) from the very high levels seen in 2012 (21% in full year 2012), resulting in operating leverage of 5.5%. Management indicated that the YoY increase in expenses largely related to acquisitions. While we do not expect the bank to deliver mid-single-digit operating leverage in International, given the investment spending in 2012, we do expect BNS to deliver 2-3% operating leverage in the segment in 2013. Importantly, commercial loan growth recovered after two consecutive quarters of disappointing QoQ growth.
Domestic P&C earnings were up 21% YoY on 13.3% YoY revenue growth and operating leverage of 1.2% (expense growth of 12.1% YoY). We were looking for earnings growth of 19%. Better than expected results relate to the ING Direct deal which added $45 million to earnings versus our estimate of $35-40 million. As Scotia functions with a significant funding gap in Canada, to the extent that the bank uses the lower cost retail deposits from ING to replace wholesale funding, the bank can quickly improve funding costs. At $45 million in earnings in the quarter, the bank is already near the $190 million run rate discussed at the time of the deal.
Over the last five years, the bank’s better earnings stability and momentum has earned Scotia an average premium of 5-7%. On our estimates, the stock currently trades at a 6% premium to the group. For the reasons outlined below, we set our target price on BNS based on the stock trading at a 7% premium (versus RY at a 6% premium). Our target P/E premium drives a target P/E of 12.3x applied against our 2014E EPS and a target price of C$69.00 (up from C$67.00).