Bad News for BNS Stock?
The Bank of Nova Scotia (NYSE:BNS) stock has been a cash machine for investors, but the good times could be coming to an end.
Canadian banks have earned a strong reputation with investors. Old-fashioned conservatism allowed them to avoid the worst of the subprime fallout. And thanks to high resource prices, these institutions have become dividend machines.
But the boom may be over. Over the past few weeks, analysts have warned that low oil prices could spark a wave of defaults. Even Scotiabank’s dividend, they worry, could be at risk.
What will this mean for BNS stock? Let’s take a look at the company’s recent results and what we’re likely to see in the upcoming report.
Stats on Bank of Nova Scotia
|Analyst EPS Estimate||$1.42|
|Change From Year-Ago EPS||4.4%|
|Revenue Estimate||$6.27 billion|
|Change From Year-Ago Revenue||7.0%|
|Earnings Beats in Past 4 Quarters||3|
Source: Yahoo! Finance
The Bank of Nova Scotia has been a cash cow for shareholders. The combination of expense management (industry lingo for job cuts) and strong banking profits has been a boon for earnings. The dividend has increased in lockstep, growing 106% over the past decade.
Analysts, though, have been pulling back their views on the company’s earnings. Over the past 90 days, the street has cut its January-quarter estimates by $0.04 per share. For full-year 2016, analysts have trimmed their profit forecast by two percent. (Source: “Analysts’ Estimates,” Yahoo! Finance, last accessed February 28, 2016.)
What happened? Blame low oil prices.
Last week, Moody’s Investor Services warned that falling energy prices would “strain the profitability” of big banks. Under their “severe stress” scenario, the credit rating agency explained, Canadian banks might need to cut dividends or issue more shares to cover defaults. (Source: Alexander, D., “CIBC, Scotiabank Worst Hit in Severe Oil Slump, Moody’s Says,” Bloomberg, February 22, 2016.)
The Bank of Nova Scotia was highlighted as the most exposed to oil losses. Energy represents a fairly small percentage of the bank’s loan book, coming in at only 3.5%. Moody’s, though, is worried that an oil patch slump could spark defaults in other products, like consumer loans and mortgages. (Source: Ibid.)
The company’s peers are already reeling. Last week, five of the Big Six Canadian banks reported first-quarter results, and so far losses have been manageable. But defaults, executives acknowledged, could grow in upcoming quarters.
Scotiabank’s management has a few options to stem losses. Executives have already cut headcounts and employee perks. Raising fees on customers has boosted profits, as well. However, it’s unlikely these efforts will be enough to hold off loan losses.
Moody’s highlighted other problems with BNS stock, too. Over the past few months, the company has expanded into unsecured auto and credit card loans. It has also branched out further into emerging markets like Asia and Latin America. (Source: Alexander, D., “Scotiabank Is Downgraded by Moody’s One Level on Riskier Lending,” Bloomberg, January 26, 2016.)
Is this a problem? Maybe. In the short term, this change will boost profits. The move, though, is a big shift away from the company’s traditionally low-risk profile.
In the Bank of Nova Scotia’s earnings report, watch provisions for future credit losses. If this number is higher than expected, it could indicate more defaults are coming. In the worst-case scenario, this could put Scotiabank’s dividend at risk.