Bank of Nova Scotia T.BNS

From RBC

[Al42]

EQUITY RESEARCH
August 27, 2024
The Bank of Nova Scotia
Few surprises this quarter and that’s good
Our view: Q3/24 results were in line with our expectations and consensus.
Credit quality remained stable QoQ, we like the larger than expected build
of performing PCLs while impaired PCLs were below our estimate, and
there were no notable signs of Canadian credit deterioration. We sense that
BNS is working away at its longer-term plan and things still seem to be going
smoothly. We increase our price target to $65 (from $62) and maintain our
Sector Perform rating.
Key points:
BNS’s adjusted EPS of $1.63 was essentially in line with our estimate of
$1.64 and consensus of $1.62. Corporate had a $465 million loss—this
segment had the largest absolute difference versus our estimate (which
was a loss of $426 million). We make small updates to our model. Our core
EPS estimates increase to $6.61 (from $6.59) for 2024, $7.55 (from $7.46)
for 2025, and $8.57 (from $8.47) for 2026. We raise our price target to $65
(from $62) and maintain our Sector Perform rating.
Total provisions for credit losses (PCLs) were $1,052 million (up ~4% QoQ),
in line with our forecast of $1,054 million. PCLs on stage 3 (impaired) loans
were $970 million, below our forecast of $1,023 million, which we view
positively. Stage 1 and 2 (performing) PCLs were $82 million, higher than
our $32 million estimate. We expect the total PCL ratio to land at 54 bps for
2024, near the high end of the guided 45–55 bps range. We model a total
PCL ratio of 55 bps for 2025.
We did not observe notable signs of Canadian credit deterioration in the
quarter. Canadian mortgages 90+ day past due increased slightly by 1 bp
QoQ to 0.20%, from 0.17% in Q1/21. The number of tail-risk clients in the
mortgage portfolio also improved sequentially, representing <1% of total
retail loan balances. Credit cards 90+ days past due decreased 5 bps QoQ
to 0.74%, and 90+ days past due secured and unsecured lines of credit
decreased 2 bps QoQ to 0.29%.
Canada P&C earnings increased ~10% QoQ and ~6% YoY to $1,111 million,
above our $1,090 million forecast. Results were stronger than expected
across the board, and the largest positive difference was impaired PCLs
of $338 million versus our $431 million estimate. We model ~6% earnings
growth in 2025, mainly driven by ~6% revenue growth.
On a forward P/E basis based on our next-12-months core EPS estimate,
BNS is trading at 9.3x, below its long-term historical average of 10.7x and
the lowest in the group. BNS is trading at a P/B multiple of 1.14x, below its
long-term historical average of 1.68x, second-lowest in the group.
RBC Dominion Securities Inc.
Darko Mihelic, CFA (Analyst)
[phone], [e-mail]
Eunseo Namkung, CPA (Associate)
[phone], [e-mail]
Michelle Li, CPA, CA (Associate)
[phone], [e-mail]
Sector Perform
TSX: BNS; CAD 67.22; NYSE: BNS
Price Target CAD 65.00 ↑ 62.00
WHAT'S INSIDE
Rating/Risk Change Price Target Change
In-Depth Report Est. Change
Preview News Analysis
Scenario Analysis*
Downside
Scenario
47.00
24%
Price
Target
65.00
3%
Current
Price
67.22
Upside
Scenario
80.00
25%
*Implied Total Returns
Key Statistics
Shares O/S (MM): 1,237.0
Dividend: 4.24
BVPS: 58.78
Tangible BVPS: 45.07
Market Cap (MM): 83,151
Yield: 6.3%
P/BVPS: 1.14x
Cash ROE: 11.2%
Avg. Daily Volume: 5,548,199
RBC Estimates
FY Oct 2023A 2024E 2025E 2026E
P/CEPS 10.4x 10.2x 8.9x 7.8x
EPS, Rpt Diluted 5.72 6.35 7.50 8.51
Prev. 6.54 7.40 8.41
P/Rpt EPS 11.8x 10.6x 9.0x 7.9x
EPS, cash Diluted 6.48 6.61 7.55 8.57
Prev. 6.59 7.46 8.47
Revenue 31.8 34.1 36.9 39.2
Prev. 36.7 39.0
EPS, Rpt Diluted Q1 Q2 Q3 Q4
2023 1.35A 1.68A 1.70A 0.99A
2024 1.68A 1.57A 1.41A 1.69E
Prev. 1.63E 1.66E
2025 1.74E 1.78E 1.96E 2.01E
Prev. 1.72E 1.76E 1.94E 1.99E
EPS, cash Diluted
2023 1.84A 1.69A 1.72A 1.23A
2024 1.69A 1.58A 1.63A 1.71E
Prev. 1.64E 1.68E
2025 1.76E 1.80E 1.98E 2.02E
Prev. 1.73E 1.77E 1.95E 2.00E
All values in CAD unless otherwise noted.
Priced as of prior trading day's market close, EST (unless otherwise noted).
Disseminated: Aug 27, 2024 22:43EDT; Produced: Aug 27, 2024 22:43EDT
For Required Non-U.S. Analyst and Conflicts Disclosures, see page 12

 

 

Q3/24 – Few surprises this quarter and that’s good
BNS’s adjusted EPS of $1.63 was largely in line with our estimate of $1.64 and consensus of
$1.62.
Total provisions for credit losses (PCLs) of $1,052 million (up ~4% QoQ and ~28% YoY) were
in line with our forecast of $1,054 million. PCLs on stage 3 (impaired) loans were $970
million (down 0.5% QoQ but up ~31% YoY), below our forecast of $1,023 million. PCLs on
stage 1 and 2 (performing) loans were $82 million, above our estimate of $32 million. We
view the Q3/24 PCL result positively. The total PCL ratio increased to 0.55% from 0.54% last
quarter and we expect Q4/24 to be relatively in line QoQ. We expect the total PCL ratio to
land around 54 bps for fiscal 2024, near the high end of BNS’s previously guided 45–55 bps.
We model a total PCL ratio of 55 bps for 2025.
Pre-tax pre-provision (PPPT) earnings on a teb basis were $3,749 million (up ~3% QoQ and
YoY), lower than our $3,874 million estimate mainly because revenues of $8,507 million were
lower than our $8,616 million estimate. Core net interest income of $4,901 million (up ~3%
QoQ and ~6% YoY) was below our estimate of $4,935 million and non-interest income of
$3,645 million was also lower than our $3,694 million forecast.
The Corporate segment had a $465 million loss (down ~10% QoQ and ~56% YoY) versus our
estimated loss of $426 million; this segment had the largest absolute difference versus our
estimate, though we should see improvement here as interest rates fall.
We make small changes to our model to reflect another quarter of DRIP discount, which is
turned off thereafter (dividend declared in Q3/24 and paid in October will be the last
dividend eligible for the DRIP discount), and slightly reduced net interest margin (NIM) in
International Banking. Our 2024 core EPS estimate increases by $0.02 to $6.61 (from $6.59),
our 2025 estimate by $0.11 to $7.55 (from $7.46), and our 2026 estimate by $0.10 to $8.57
(from $8.47).
Applying a target P/E multiple of 9.0x to our next-12-months core EPS estimate, we increase
our price target to $65 (from $62). We maintain our Sector Perform rating.
Canada P&C results better than we expected
Canada P&C (ex-wealth) adjusted earnings of $1,111 million (up ~10% QoQ and ~6% YoY)
exceeded our estimate of $1,090 million (Exhibit 1). Better than expected earnings were
mainly driven by lower than expected PCLs and expenses, which more than offset lower
revenues than we anticipated. Total PCLs of $435 million were below our $454 million
estimate and non-interest expenses of $1,525 million were lower than our $1,532 million
estimate. Total revenues of $3,480 million were below our $3,490 million forecast.