Scotiabank (Trinidad & Tobago) Limited – Valuation

27 January 2015


FSL’s valuation of Scotiabank (Trinidad & Tobago) Limited (SBTT) represents the first in a continuous series of intrinsic and relative valuations of equity investments on the Trinidad & Tobago Stock Exchange (TTSE).SBTT is incorporated and domiciled in the Republic of Trinidad and Tobago and offers a complete range of banking and financial services as permitted under the Financial Institutions Act, 2008. SBTT and its subsidiaries’ is majority owned and controlled by the Bank of Nova Scotia a Canadian bank holding company with an A+ credit rating from S&P. Given its parent’s reach throughout the Caribbean, SBTT’s primary focus is to meet the financial intermediation needs within the Trinidad & Tobago market.SBTT’s wholly owned subsidiaries and associated companies and their principal activities are detailed below:-

 

Source: SBTT Annual Report 2013

  • Scotiatrust and Merchant Bank Trinidad and Tobago Limited (Scotiatrust) is a licensed merchant bank and mortgage institution. Its principal activity includes arranging and underwriting issues of marketable securities.
  • ScotiaLife Trinidad and Tobago Limited (ScotiaLife) is registered to conduct ordinary long-term insurance business under the Insurance Act, 1980.
  • Scotia SKN Limited was incorporated under the Companies Act, 1996 of the Federation of St. Christopher and Nevis. Its principal activity is the purchase and holding of investments.
  • Scotia Investments Trinidad and Tobago Limited’s principal activity is the provision of investment brokerage services to investors on the local market such as equity and bond trading.
  • InfoLink Services Limited offers clearing and switching facilities for the electronic transfer of funds.
  • Trinidad and Tobago Interbank Payments System Limited’s principal activity is the operation of an automated clearing house that provides for collection, distribution and settlement of electronic credits and debits.

Based on its corporate structure SBTT offers three (3) main services to the T&T financial market:-

  • Retail, Corporate / Commercial Banking
  • Trust & Merchant Banking
  • Insurance services

SBTT Segment Analysis
For the year ended October 31, 2014 the Retail, Corporate and Commercial Banking was the key driver of Total Revenues generating TT$1.170B for approximately 72% of all revenues generated by the group before eliminations. Insurance Services followed contributing TT$438M or 27% of Total Revenues before eliminations.

Retail, Corporate and Commercial Banking is also the primary contributor to Net Profit before taxes TT$766M, whilst also controlling approximately 55% of Total Assets and 88% of all Liabilities.

Group Financial Analysis
SBTT’s operating performance has been challenged over the past six (6) years by T&T’s inconsistent GDP growth, surplus liquidity within the financial system and a consistent decline in interest rates and bank spreads.

Over the period 2009 – 2014 Net Interest Income has grown by 6.85% to TT$889M. However, Other operating income has increased by 63% from TT$303M to TT$494M. For the period 2009 – 2014 SBTT has also consistently managed its operations generating an average efficiency ratio of 43.23 as compared to its peers Republic Bank Limited (49.63) and First Citizens Bank Limited (53.68).

SBTT’s strong growth is also reflected in Earnings Before Interest and Taxes increasing from TT$586M in 2009 to TT$744M by year end 2014 approximately 27% over the six (6) year period.

As a group SBTT has consistently generated solid financial returns. For the period 2009 – 2014 SBTT has generated and average Return on Equity of 20.2% and Return on Assets of 3.17%. The Group also continues to generate positive cash flows from operations which are redirected into investing activities and dividend payments to shareholders.

On a comparative basis SBTT is also a superior performer to its peers (RBL & FIRST). Utilising Du Pont analysis as a measure of ROE, SBTT is seen as more profitable, more efficient and less leveraged than both RBL & FIRST over the period 2007 – 2013. See Table 1 below:-

Source: Bloomberg, FSL
Figure 2 below shows the ROE trend for SBTT and its major peers for the years 2007 – 2014. Reflective of the challenging environment for financials the overall trend is downwards. SBTT however, is able to outperform its peers based on its superior operating margin and asset efficiency.

 Source: Bloomberg, FSL

In addition to its earning ability SBTT has also demonstrated significant strength through the quality of its Balance Sheet by showing a Tier1 capital ratio of approximately 25% as at fiscal year-end October 31, 2014.

Following the publication of year end 2014 financial results by SBTT’s parent company a decision was taken to close 120 international branches of which 35 would be in the Caribbean. To date there has been no indication if this would affect the T&T operations.

SBTT’s valuation would be conducted using both a Dividend Discount Model (DDM) and relative valuation techniques.

Relative Valuation
The relative valuation technique uses the P/E ratio as an indicator of market value. Based on the available peers on the TTSE First Citizens Bank (FIRST) was considered the closest comparative entity. As opposed to other listed banking entities FIRST & SBTT primarily operate in the T&T market with limited exposure to the wider Caribbean.

As at writing FIRST had a P/E of 14.60 times.

For the year ended October 31, 2014 SBTT had Earnings per Share (EPS) of TT$3.18.

A relative valuation for SBTT applies FIRST P/E ratio to its EPS for an approximate market value as follows:-

SBTT Share Price = 14.60 * 3.18 = TT$46.43.

As per the relative valuation SBTT is overvalued based on its market price of TT$62.00 per share. However as the Du Pont analysis above shows SBTT’s performance is superior to that of FIRST’s and as such has been rewarded with a higher P/E ratio of 19.53 times by investors.

Dividend Discount Model (DDM)
SBTT’s DDM valuation was completed using a medium term holding period. Utilising proprietary FSL information the key determinants for the DDM include:-

  • SBTT’s required rate of return – 9.30%
  • FSL’s internal dividend projections
  • SBTT’s long-term growth rate assumption – 7.85%

The long-term growth rate assumption takes into consideration the mature nature of SBTT’s business, an existing dividend payout ratio almost to 60% of earnings and financial performance over last three (3) years in a market of limited growth.

Based on the above discount and growth rates as well as FSL’s internal dividend projections SBTT’s intrinsic value is measured within the range TT$63.00 – TT$65.00 per share indicating there is some potential upside for the stock.

Placing greater emphasis on the Dividend Discount Model FSL recommends a BUY on SBTT.

For additional information on FSL’s assumptions and valuations of other listed equities please contact Firstline Securities Limited at info@firstlinesecurities.com or at 868.628.1175, we can discuss your investment needs in detail and craft a portfolio that makes sense for you. We look forward to hearing from you.

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