Mortgage+ And Scene+ Initiatives Will Strengthen Future Client Acquisition And Earnings Stability

Key Takeaways

• Strategic redeployment of capital and focus on higher-growth markets are enhancing earnings, shareholder value, and return on equity.
  
• Emphasis on core deposits and multiproduct client growth supports funding, margin expansion, and noninterest income boosts.
  
• Elevated credit loss provisions and geopolitical uncertainties pose risks to Scotiabank's net margins and long-term revenue, with significant impacts from asset sales and economic factors.

Catalysts

Provides various banking products and services in Canada, the United States, Mexico, Peru, Chile, Colombia, the Caribbean and Central America, and internationally.

• Scotiabank is actively redeploying capital towards markets with higher growth potential, such as its investment in KeyCorp, expected to contribute positively to earnings growth and return on equity metrics, impacting overall earnings and shareholder value.
  
• The bank's focus on growing core deposits, evidenced by strong year-over-year deposit growth that outpaced loan growth, improves the funding profile and has the potential to enhance net interest income and margins.
  
• Scotiabank is achieving productivity improvements, with international operations showing disciplined 1% expense growth versus 4% revenue growth, supporting operating leverage and potential margin expansion.
  
• The institution's emphasis on multiproduct client growth and initiatives like Mortgage+ and Scene+ are driving increased client acquisition and retention, expected to boost revenue per client and noninterest income.
  
• The strategic focus on expanding advisory and Global Banking and Markets operations demonstrates potential for continued strong performance in capital markets and advisory revenues, thereby contributing to noninterest income and overall earnings stability.

Bank of Nova Scotia Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bank of Nova Scotia's revenue will grow by 15.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.6% today to 22.1% in 3 years time.
• Analysts expect earnings to reach CA$9.9 billion (and earnings per share of CA$8.07) by about March 2028, up from CA$6.2 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as CA$10.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, down from 13.8x today. This future PE is greater than the current PE for the US Banks industry at 13.1x.
• Analysts expect the number of shares outstanding to grow by 1.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.15%, as per the Simply Wall St company report.

Bank of Nova Scotia Future Earnings Per Share Growth

Risks

• Scotiabank faces elevated provisions for credit losses, impacted by the toll of higher interest rates, inflation, and geopolitical uncertainty, which could affect net margins.
  
• The sale of operations in Colombia and Central America resulted in a significant after-tax loss, affecting net earnings.
  
• The threat of potential tariffs on Canadian and Mexican imports introduces significant macroeconomic uncertainty, posing risks to revenue growth and potentially increasing credit losses.
  
• Higher non-retail credit migration could necessitate increased allowances for credit losses, impacting net earnings.
  
• There is a slowdown in primary client growth due to immigration deceleration, which could potentially affect long-term revenue targets.

Valuation

• The analysts have a consensus price target of CA$79.2 for Bank of Nova Scotia based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$44.5 billion, earnings will come to CA$9.9 billion, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 9.2%.
• Given the current share price of CA$69.1, the analyst price target of CA$79.2 is 12.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.