A perpetual underperformer. Unfortunately for the Bank of Nova Scotia (TSX:BNS) shareholders, the bank has underperformed its peers over the past decade. In the past three, five and ten year time frames, the Canadian stock has delivered either the worst, or second worst price returns.
On average, its share price has returned an average of 6.67% annually over the past 10 years. This is approximately 180 basis points below the Big Five average and almost half that of the industry leader (12.6%).
Why has the company struggled? There are many reasons, but one of the main catalysts has been the company’s previous growth strategy. It has been the most aggressive bank in terms of acquisitions. In fiscal 2017, the company closed on $7 billion worth of deals.
Diversification has come at a cost
As a result of its rapid international expansion, it was quickly labeled as Canada’s most international bank. It is what set them apart from their big banking peers. Unfortunately, this diversification came at a cost.
The risk when entering new markets and making acquisitions is that the expected synergies aren’t realized. Likewise, certain international markets can be highly volatile and thus subject to considerable political and economic risk. Ultimately, the bank was unable to generate the returns it expected when it first acquired these international assets. In fact, most Canadian bank ETFs have Scotiabank as the lowest in terms of allocation due to its performance.
Last fall, Chief Executive Officer Brian Porter announced that it would take a break from acquisitions.
Not only that, but the bank would re-focus its international expansion on one key area: Latin America. As a result, it announced its intentions to dispose itself of non-core assets such as its banking operations in the Caribbean and its life insurance businesses in Jamaica and Thailand.
The renewed focus was a welcomed one. Year to date, it has posted returns of 11.89%, good enough for the bank to no longer be considered a laggard.
Disposal may take some time
Unfortunately, it may take a little longer for the company to dispose of its Caribbean assets. Subject to regulatory approval, it had signed an agreement to sell all of its banking operations to Republic Financial Holdings.
Unfortunately, it is currently locked in a standoff with the government of Antigua and Barbuda which has thus far refused to approve the sale of its Antiguan branch. Yesterday, Guyana’s central bank nixed the sale of its local operations in that country.
In a statement, Republic Financial said that they have received five of the nine required approvals. The longer this drags on, the longer it will continue to negatively impact company operations. These assets have been a drag on earnings and ultimately, it may decide to shutter these banks instead of selling off the assets.
In either case, these barriers will have a negative impact over the short term. Longer term, the company will be in a better position which should lead to increased shareholder returns.
If you’re looking for a company with strong revenue and earnings growth in the financial sector and are willing to take a little more risk, why not have a look at Goeasy Ltd?