Bank of Nova Scotia (BNS): BuyBank of Montreal (BMO): Sell
Buy / Sell Presentation
January 31, 2007
Western Investment Club – Created by Financial Group, January 31, 2007
Western Investment Club – Created by Financial Group, January 31, 2007
Outline of Presentation
Canadian Banking - Industry Analysis
Company Overview: Bank of Nova Scotia
Company Overview: Bank of Montreal
Summary of Thesis
Financial Analysis
Recommendation
Questions
Western Investment Club – Created by Financial Group, January 31, 2007
Canadian Banking Sector
Western Investment Club – Created by Financial Group, January 31, 2007
Industry Analysis
Highly Concentrated Industry Canada: Fewer than 20 domestic commercial banks United States: Over 7,600 commercial banks 90% of the industry’s $1.8 trillion assets are held by six institutions (RBC, TD,
Scotia, CIBC, BMO, National Bank) Major banks are looking outside of Canada for growth opportunities
High Dividend Yield ~ fairly consistent at approximately 3-4%
Advanced Systems Canadians are the highest per capita users of ABM and debit card services in
the world 88.2 debit card transactions per person High use of online banking compared to other countries
Strong and Consistent Historical Performance
The Canadian Banking industry provides strong upside exposure, with limited downside risk
Western Investment Club – Created by Financial Group, January 31, 2007
Historical Price Chart
Historical Performance - Canadian Banks
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2000 2001 2002 2003 2004 2005 2006
Year
An
nu
al R
etu
rn
Average BNS BMO TSX
The five major Canadian banks have returned an average of 22.1% over the last seven years compared to the TSX’ annual return of 7.8%
Western Investment Club – Created by Financial Group, January 31, 2007
Historical Performance
The Bank of Nova Scotia has provided an above average return and has not experienced a down-year since 2000
Average Performance - Last Seven Years
Bank Average High Low
Royal Bank 25.3% 66.3% 2.9%Bank of Montreal 26.8% 69.7% -14.0%Bank of Nova Scotia 23.5% 56.8% 7.3%CIBC 20.5% 56.1% -17.0%TD 14.6% 37.8% -21.5%
Average - Banks 22.1% 57.3% -8.5%TSX 7.8% 29.8% -18.0%
Western Investment Club – Created by Financial Group, January 31, 2007
Bank of Nova Scotia
Western Investment Club – Created by Financial Group, January 31, 2007
Company Overview
Second Largest Bank in terms of Market Cap. ($50bn)
2006 Revenue of $11.6bn
2006 Net Income of $3.55bn
13% Growth in EPS for 2006
Large presence in Central and South America compared to other Canadian banks
57,000 employees with operations in 50 countries
Liked by Mr. Jim Cramer!!!
Western Investment Club – Created by Financial Group, January 31, 2007
Divisional Breakdown
Domestic Banking: 36% of Net Income Retail & Small Business: 67% of Division’s Revenue Commercial Banking: 16% of Division’s Revenue Wealth Management: 18% of Division’s Revenue
Scotia Capital: 30% of Net Income Global Capital Markets: 52% of Division’s Revenue Global Corporate and I-Banking: 48% of Division’s Revenue
International Banking: 30% of Net Income Caribbean & Central America: 40% of Division’s Revenue Mexico: 37% of Division’s Revenue Latin America, Asia, and Other: 23% of Division’s Revenue
The Bank of Nova Scotia has significantly more exposure to Mexico, Central America and Latin America than other Canadian banks
Western Investment Club – Created by Financial Group, January 31, 2007
What is Domestic Banking?
Retail & Small Business Provide mortgages, loans, credit cards, investments, insurance and
day-to-day banking products to individuals and small businesses Have 972 branches and 2,742 ABMs throughout Canada
Commercial Banking Serve large corporate customers with a full suite of products including
accepting deposits and making loans Revenues grew by 6% in 2006
Wealth Management Includes retail brokerage, investment management advice, mutual
funds and savings products, and financial planning
Overall growth for the division in 2006 was 2% and the division is not expected to grow substantially in the future
Western Investment Club – Created by Financial Group, January 31, 2007
What does Scotia Capital do?
Global Capital Markets Provide product / services in a variety of areas including fixed income,
derivatives, foreign exchange, precious metals and equity sales, trading and research
Corporate derivatives team and foreign exchange team ranked #1 in Canada
Global Corporate & Investment Banking Provides corporate lending, equity underwriting and mergers &
acquisitions advisory services
While growth in this division was 14% in 2006, it is expected to grow at a lower rate going forward
Western Investment Club – Created by Financial Group, January 31, 2007
International Banking
Western Investment Club – Created by Financial Group, January 31, 2007
International Banking
Caribbean and Central America 15% organic growth in 2006 Low banking penetration in region attractive market Commercial lending, credit cards and mortgages are driving growth Largest private bank in Costa Rica after acquisition of Interfin, giving it
a market share of 14% Named Bank of the Year in Jamaica and the Dominican Republic by
Euromoney magazine well reputed 15.6% annual growth rate since 2001
The full-year impact of acquisitions in 2007 and high organic growth should result in strong 2007 performance in the region
Western Investment Club – Created by Financial Group, January 31, 2007
International Banking
Mexico Revenue grew 14% (including 5% currency loss) in 2006, while
contribution grew 62% Strong growth in credit cards, brokerage fees, mortgages and
commercial loans Partnered with the NFL to issue co-branded cards in Mexico Planning on adding 100 branches in Mexico in 2007
Latin America, Asia, and Other Revenues grew 27%, primarily due to acquisition in Peru Slowest growth in International Banking Segment Management is not as focused in this region
With 32% earnings growth in 2006 (including 8% decrease for FX), the outlook for the international banking segment is favourable
Western Investment Club – Created by Financial Group, January 31, 2007
Bank of Montreal
Western Investment Club – Created by Financial Group, January 31, 2007
Company Overview
Fourth Largest Bank in terms of Market Cap. ($35bn)
2006 Revenue of $10.1bn
2006 Net Income of $2.60bn
11.6% Growth in EPS for 2006
Pursuing growth in the US acquired First National Bank & Trust in Indiana, a personal and commercial bank in the US Midwest
Not recommended by Mr. Jim Cramer!!!
Western Investment Club – Created by Financial Group, January 31, 2007
Company Overview
Net Income by Geography Canada: 75% United States: 17% Other: 8%
Operating Groups Personal & Commercial Banking: 47% of net income Private Client Group: 14% of net income Investment Banking Group: 32% of net income 2/3rds of US net income is from I-Banking, while 1/3 is from the
personal and commercial banking division
BMO has very little exposure to emerging countries compared to the Bank of Nova Scotia, but is more exposed to the US
Western Investment Club – Created by Financial Group, January 31, 2007
Divisional Overview
Personal & Commercial Banking Provide consumers with every day banking needs, including financing,
investing, credit card and insurance needs; offer corporate customers a full range of banking products / services
90% of revenue is from Canada, but they face aggressive competition in the US (US cash earnings declined 19% in 2006)
Negative income growth
Private Client Group Represents BMO’s wealth management business including full-service and
direct investing, private banking and investment products One of the strong areas of BMO with double digit growth
Investment Banking Group Provide standard banking services such as equity / debt underwriting, sales &
trading, institutional research, M&A advisory, etc. Expected to grow at mid-single digits
Growth in the Private Client Group should help offset decline expected in Personal and Commercial Banking
Western Investment Club – Created by Financial Group, January 31, 2007
Summary of Thesis
Western Investment Club – Created by Financial Group, January 31, 2007
Highlights of Investment Thesis (BNS)
Positives Large exposure to emerging markets with significant growth potential 2006 acquisitions should be accretive in 2007 Management signalling confidence in 2007, raising EPS growth
targets to 7-12% from 5-10%
Risks Foreign Exchange Risk in International Banking Segment Slow growth in domestic franchise, which is not viewed as highly as
other domestic banks Political risk in emerging countries
While there are risks to the investment, we believe that there is significant upside potential going forward
Western Investment Club – Created by Financial Group, January 31, 2007
Highlights of Investment Thesis (BMO)
Negatives Weak US retail performance and increasingly competitive
environment Limited growth potential relative to BNS Most attractive prospects (wealth management) are in the smallest
division
Risks Lower earning expectations may already be factored into price Has been the best performing bank (in terms of stock price) over the
last seven years Management change
The outlook and growth prospects for BMO are weak relative to other Canadian banks, especially BNS
Western Investment Club – Created by Financial Group, January 31, 2007
Financial Analysis
Western Investment Club – Created by Financial Group, January 31, 2007
Historical Performance
Scotiabank is trading slightly above market, but has a fair amount of upside.
Market Price / Earnings Dividend PEGCompany Price Cap. ($bn) 2006E 2007E Yield Ratio
Royal Bank 54.09$ 71.01$ 15.02 x 13.94 x 2.59% 1.31Bank of Montreal 68.78 34.55 13.14 12.87 2.13% 1.55Scotiabank 51.72 51.55 14.51 13.67 2.88% 1.25Toronto Dominion 69.15 50.02 10.91 13.33 2.55% 1.26CIBC 98.81 33.03 13.11 13.85 2.81% 1.90
Average 48.03$ # 13.34 x 13.53 x # 2.59% 1.45 High 71.01$ # 15.02 x 13.94 x # 2.88% 1.90 Low 33.03$ # 10.91 x 12.87 x # 2.13% 1.25
Western Investment Club – Created by Financial Group, January 31, 2007
Recommendation
Western Investment Club – Created by Financial Group, January 31, 2007
Recommendation
Buy 200 Shares of BNS
Sell 200 Shares of BMO
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