Bank of Nova Scotia is chock full of cash and capital after reporting another set of stellar earnings, prompting the lender to contemplate more acquisitions.
For the second time in one year, Scotiabank reported a record set of core quarterly earnings, extending a streak of top-notch profits from Canadian lenders. Like many of its rivals, Scotiabank continues to benefit from solid domestic personal and commercial banking operations, as well as a hot market for wealth management, but was also aided by some significant securities gains.
With its capital ratio now sitting at 9.8 per cent, well above the 8-per-cent minimum level mandated by regulators, and with few domestic shocks on the horizon, Scotiabank has the flexibility to scoop up some assets. Although chief executive officer Brian Porter did not outright say he is looking to go buying, his comments suggest he is targeting some acquisitions – particularly in Latin America.
When asked on a conference call if he is intent on making any purchases, Mr. Porter offered a nuanced response that did not dispel the speculation, adding that "we do have a pipeline of acquisitions that that we are looking at periodically," provided they fit with Scotiabank's strategy.
Since he took over as CEO in November, Mr. Porter has made an effort to outline where he wants to focus Scotiabank's foreign operations. Surprising few, he is intent on expanding in Colombia, Peru, Chile and Mexico, where Scotiabank has already bought stakes in personal and commercial banks and wealth managers over the past few years, most recently 50 per cent of Peruvian pension fund manager AFP Horizonte.
Managing retirement assets is particularly lucrative in Latin America because few countries have government-run programs, such as the Canada Pension Plan. Instead, the norm is for a portion of each employee's paycheque to go into a defined contribution account, which can then be overseen by an asset manager.
Mr. Porter also said Tuesday that the bank does not have plans to buy back more shares – leaving more cash for acquisitions – and he hopes to expand the portion of Scotiabank's profit that is generated abroad. Currently, 43 per cent of earnings come from beyond Canada's borders; he would be comfortable with that number reaching as high as 50 per cent. However, that growth could also happen organically.
In the second quarter, Scotiabank earned $1.8-billion or $1.39 a share, up 14 per cent from a year earlier. It made $565-million from Canadian banking last quarter, up 11 per cent from the year prior, with double-digit gains in credit card and auto lending volumes. However, the domestic operation is showing signs of cooling – something that is becoming the norm across the sector. Quarter-over-quarter, the Canadian banking arm saw its profits dip slightly.
Scotiabank's wealth management and insurance arm posted its second consecutive record quarterly profit, with earnings of $345-million, while its capital markets arm had its best quarter in a year and a half, boosted by stronger investment banking activity.
Internationally, Scotiabank's personal and commercial banking operations still haven't found something to kickstart their earnings, and the division continues to suffer from lower loan margins and higher provisions for credit losses. But the arm hasn't dramatically coloured the bank's outlook.
"We believe that the core strength of Scotia's earnings should provide the impetus for additional growth going forward," Barclays Capital John Aiken wrote in note to clients.
Scotiabank recently made waves by announcing plans to monetize its 37-per-cent stake in asset manager CI Financial, which was acquired from Sun Life Financial in 2008. Mr. Porter still hasn't decided on the best way to sell off the stake. "We don't know how this is going to unfold, whether it's in one transaction or a series of transactions," he said on the call.
The bank is also intent on beefing up its domestic credit card offerings, and recently struck a deal to acquire a 20-per-cent stake in Canadian Tire Financial Services, which is Canada's eighth-largest credit card issuer.