Scotiabank_Analysis

Company Introduction Scotiabank is classified in the Canadian banking industry and other banking industries worldwide. The Canadian banking industry is comprised of 13 domestic banks, 34 foreign bank subsidiaries, and 11 foreign bank branches operating in Canada (Department of Finance Canada, 2001). In recent times, the banking industry has become unstable as a result of the US subprime crisis and Canadian banks have not been immune. Since the second half of 2007, major central banks injected record amounts of cash to calm the credit markets and prevent a complete meltdown in the financial system (Mergent Inc., 2008). Since its incorporation in 1832, Scotiabank has risen to be Canada’s most international bank and one of North America’s leading financial institutions (Mint Global, 2008). Through a team of over 69,000 employees, the Bank and its affiliates offer a broad range of products and services, including personal, commercial, corporate, and investment banking, to more than 12.5 million customers in some 50 countries around the world (Scotiabank Annual Report, 2008). Scotiabank has many stakeholders, the two primary ones are the shareholders and employees. The main concerns of the Bank’s employees include a healthy work environment, competitive compensation, and equality in the workplace. In order to address these issues, Scotiabank Group developed the Scotiabank Chain of Communication. This set of guidelines provides an outlet for employees to address their concerns without fear of retaliatory actions against them (Scotiabank, n.d.). For example, as a result of compensation concerns, the Bank has now changed its reward policy towards employees to include incentive pay, employee share ownership, pension plans, and employee benefits (Scotiabank, n.d.). Respecting diversity and keeping its employees content, Scotiabank develop a competitive advantage in the industry. Shareholders comprise Scotiabank’s second stakeholder group. Their primary concerns include stable financial and operational growth, as well as legal and responsible business practices. To address these issues, the Bank publishes an annual report allowing its shareholders to see the company’s activities. Furthermore, it has corporate governance guidelines and procedures set in place which outline the permissible conduct of all directors, officers, and employees (Scotiabank, n.d.). It is through these governance policies that Scotiabank addresses the needs of its shareholders. The Bank is committed to making profits in order to satisfy its shareholders and ensure continued growth in the financial sector. As a whole, Scotiabank targets companies and individuals, through retail, wealth management, small businesses and commercial services within Canada and internationally. These target markets are addressed in the three major business lines: Canadian Banking, International Banking and Scotia Capital. Each one of these business lines focuses on different markets, portrayed by the range of products that they have to offer. Canadian Banking deals with more than 7 million customers across Canada, including small, medium, and large businesses. Its network includes 1,016 branches and 2,943 Automated Banking Machines across the country (Scotiabank, n.d.). This line of business is subdivided into Retail and Small Business Banking which focuses on individuals and their everyday banking needs; Wealth Management, including financial advice for larger accounts, and Commercial Banking, that takes care of medium and large businesses. The personal banking division, which this report mainly focuses on, is targeting younger customers more as the Bank could cross sell more products and services to this customer base as well as increase the segment’s product holding within the bank (Dhesi, 2007). With an aging population, it is important to gain new customers in order to continue in business. International Banking targets those looking for retail services and commercial banking operations abroad. With the goal of being the top Canadian-based financial service company, Scotiabank has spread its influence in over 40 countries through 1,850 branches and 3,300 Automated Banking Machines (Scotiabank, n.d.). Scotia Capital is the corporate line of business offered by the bank. It focuses on corporate governments and institutional investor clients in Canada and Mexico by offering investment products. Their services range from providing loans and investment products to financial advice. Organized by industry, there are 27 offices woldwide and more than 300 relationship managers (Scotiabank, n.d.). This line of business uses NAFTA as a strategic base for its expansion. The actions of the Canadian government significantly impact the way Scotiabank and the entire banking industry conduct their operations. The government acts as a regulator of the banking industry and sets specific standards in order to protect the customers' interests. The most effective regulation that the government has installed is the issuing of quarterly and annual reports, which all public companies must publicly release. These reports contain important information on how the company conducts its business and whether or not it meets the goals that it sets. These documents make the companies more publicly accountable for their actions. All banking institutions operating in Canada are subject to the requirements outlined in the Bank Act of Canada. The Bank Act was passed in 1871 by the federal government and has been amended numerous times since then. It outlines how banks are to operate in Canada (Canadian Bankers Association, 2009), and lays out specific requirements that must be met by banking institutions. Under the Bank Act, banks must hold certain capital ratios. It is stated through government legislation that all banks must have a capital ratio of at least 10% (Department of Finance Canada, 2001). For a detailed listing of some of the requirements, please refer to Appendix A. Scotiabank, being a banking institution in Canada, must abide by the Act in all respects. Marketing and Operations Management Scotiabank offers numerous products and services within its personal banking division which can be categorized into four groups: day-to-day banking, borrowing, insurance, and investing. The day-to-day banking services comprise of transaction accounts, savings accounts, and financial planning services (Scotiabank, n.d.). These services are used frequently on a day-to-day basis by its customers. The borrowing services, that are provided to customers, include personal loans, mortgages, and lines of credit. They offer competitive interest rates on loans and mortgages in order to attract customers to their services. Scotiabank also offers insurance and investment services. The insurance services the Bank provides are not unlike those offered by other financial institutions. They offer life insurance, creditor insurance, and travel insurance to their customers. Customers wishing to invest their money have many options with Scotiabank. Not only do they offer investment accounts, they also provide financial planning to their customers so they can invest their money with greater confidence (Scotiabank, n.d.). Scotiabank ensures the quality of its products and services in many ways. The first is through comparing their interest rate with competitors in the market. By knowing what their competitors offer, Scotiabank can adjust and configure its services to better suit the consumer and try to attract more customers. The company frequently adjusts its policies to ensure the quality of their services. By following company guidelines, Scotiabank can meet high standards for its services day after day. A final way in which Scotiabank ensures the quality of its services is through the use of Secret Shoppers. This means having people act as if they were the customer and rate their experience. The reports are then passed on to the appropriate people who then make decisions on how to improve their product standards or how to continue to meet the expectations of the customer. There are many factors that go hand in hand when determining what products and services Scotiabank will provide. Banks must determine how to set prices, and how to promote and place the products and services in the market. The status of the economy is always taken into consideration when deciding what services to offer and what products to provide. For example, during these uncertain economic times, Scotiabank is offering lower interest and mortgage rates in order to promote consumer spending and to attract consumers. Prices are set with respect to the interest rates offered to banks by the Bank of Canada (BOC). The Bank Rate is the rate at which the BOC lends funds to financial institutions such as Scotiabank (Bank of Canada, 2009). If the Bank of Canada charges Scotiabank a certain bank rate, then Scotiabank must charge a comparable rate on its products and services in order to turn a profit. Scotiabank also has to consider its competitors when setting the price level for its products. They must be strategic in setting their prices otherwise consumers will take their business and banking needs elsewhere. The products and services described above benefit society in many ways. Scotiabank offers a secure place for customers to store their money. Customers earn interest on their funds which puts more money in their pockets. Instead of keeping their money at hand, customers have the peace of mind that their funds are safe and earning interest at a Scotiabank branch. Scotiabank’s investment services and advice help customers avoid potential problems and challenges, allowing them to bank with confidence. The more informed a customer is, the more likely they are to avoid potential problems associated with economic downturns. All of these factors preventcustomrs from having to constantly worry about their money. It can be said, then, that Scotiabank positively affects society and will continue to do so in the future. In order to maintain its market share, Scotiabank focuses on continual acquisitions of other banks within Canada and around the globe. It has recently acquired an undisclosed major share of Five Continents Financial, an institution in the Cayman Islands (Mint Global, 2008). This and other acquisitions increased the Bank’s presence in South America and the Caribbean. For a more detailed listing of recent acquisitions, refer to Appendix B. Technology has played an increasing role in the banking industry over the past years. Banks use technology more frequently and focus on three main areas: increasing security, increasing efficiency and productivity, and facilitating processes for their customers (Bureau of Labour Statistics, 2008). Scotiabank has recently made significant strides regarding all three areas. It has increased security regarding the protection applied to accounts and in the use of telephone and online banking. Some of the measures taken are enforcing the use of 128-bit encryption browsers and constantly monitoring their accounts in order to spot any kind of abnormal behavior. This helps prevent unauthorized access to the bank systems, which protects the customers and, ultimately, the bank’s reputation. Regarding efficiency, Scotiabank signed a $480 million outsourcing deal with IBM in September 2007. Under this contract, IBM will manage the information technology operations of the Bank (“Scotiabank seal,” 2007). Most banks, including Scotiabank, are now offeing telephone banking, on-line banking and mobile banking. The convenience that this brings to customers can determine whether a person wants to deal with a certain bank or take their business elsewhere. Technology in this area is essential to providing customers with services other banks do not. Corporate Social Responsibility Social and ethical responsibility has become increasingly important to Scotiabank. Since 1834, Scotiabank has prided itself in the idea of being ethical and socially responsible. An examination of the following two primary activities that demonstrate these traits will show that Scotiabank is living up to its commitment to corporate social responsibility (CSR) as outlined in their CSR policies. Scoitabank recognizes its responsibility towards the community and shows it by aiding in the development of society. Scotiabank involves its employees in local fundraising activities and volunteer activities for many non-profit organizations (Scotiabank CSR, 2008). By fundraising and donating their time, Scotiabank and its employees show a commitment to the development of the community. Scotiabank does an excellent job promoting these values as they involve their top management in the process as well. Scotiabank understands the importance of the environment and is trying to move towards sustainable development. The company is trying to reduce its environmental footprint by improving the efficiency in the use of paper products and office equipment (“New Scotiabank Environmental”, 2008). By offering paperless banking, Scotiabank can significantly reduce its impact on the environment. Considering the significant number of transactions performed each year, paperless banking will significantly reduce the paper consumption. This helps with the conservation of forests, an important natural resource. Also, by purchasing multi-functional office equipment, efficiency will be enhanced and the environmental impact of the factors of production will be much less (“New Scotiabank Environmental”, 2008). Instead of purchasing a printer, a photocopier, scanner, and fax machine, a multi-functional machine could be purchased instead. The pollution and strain on natural resources from the factors of production of each of the units would be decreased as one would need less material for one machine rather than four (“New Scotiabank Environmental”, 2008). Based on these factors, it can be concluded that Scotiabank is actively promoting environmental sustainability and is on the right path. Recent Issues Scotiabank does not always act responsibly. The Bank has recently been involved in a lawsuit with its employees regarding unpaid wages. Cindy Fulawka, who represents the employees in the lawsuit, filed a 350 million dollar class action lawsuit against the Bank (Bao, 2008). The lawsuit is on behalf of current and former-non-management, non-unionized employees of Scotiabank working in retail branch offices across Canada. This accusation has stained the company image and has put some discomposure between the Bank and its most imperative stakeholders: the employees. This event could be a determining factor for people seeking work at Scotiabank. Prospective employees may choose to go elsewhere if they believe that Scotiabank does not offer a high-quality work environment. Canadian National Railway (CNR) and CIBC have also faced similar claims as Scotiabank (Bao, 2008). Over recent years, the “Green” movement has become more popular in the banking industry as businesses begin to change their policies in order to be more environmentally respectful. Scotiabank decided to get on board by offering paperless banking. With new technologies being developed every day, the Bank has seen an increase in efficiency while being more environmentally friendly (Whitnall, 2000). The bank has found that paperless banking has a profit margin of 47 percent while traditional banking has a profit margin of a mere 26 percent (Menon, 1999). For Scotiabank, this appears to be a win-win situation. Many companies have been hit by the “Green” movement negatively; however, Scotiabank has turned what others view as negative into a positive situation. Companies, like Scotiabank, who demonstrate social and environmental responsibility can improve their competitive advantage and increase their market share in the industry. The banking industry as a whole has been faced with the difficult issue of online banking security. Over recent years, the number of attacks on online backing services has been steadily increasing (Buckstein, 2008). In order to combat this important issue, banks are investing more and more of their revenues into implementing new security features and procedures. This has a profound impact on the banking industry. According to the Canadian Bankers Association, the six largest banks in Canada, one of which is Scotiabank, spent 4.4 billion dollars on security infrastructure in 2006. In the decade lasting from 1996 to 2006, these same banks spent a total of 37.6 billion dollars on the same infrastructure (Buckstein, 2008). This issue brings a great monetary cost to Scotiabank and the other banks who offer online banking and will continue to do so well into the future. In addition, the banking industry has been significantly impacted by the recent economic downturn. American foreign and domestic banks have already been granted a break by the US treasury department with a new $700 billion bailout law. This market intervention was important in preventing an economic depression but that action increased more credit and debt in weakening economy (Newman, 2008). The top five Canadian banks have raked in $18.9 billion dollars in profits while compared to top banks in the US which have net loss of $37 billion dollars. Even though the profits are weaker than in previous years, Canadian banks are still posting higher profits than the major banks in the US of which some are currently facing debt or bankruptcy (Norris, 2009). Although the credit crisis has not been much of an issue in Canada, the situation will soon worsen. Although Scotiabank has weathered the storm much better than its competitors, it is still cause for concern. The reduction in profits has caused numerous layoffs increasing unemployment as many branches are unable to sustain the costs of employment with. At this moment, it is uncertain how Scotiabank will be impacted in the long-run Financials Scotiabank experienced growth in its net income up until its record-high of $3,994 million in the fiscal year ending October 31, 2007, with earnings per share averaging $4.01. This was an increase of 13% from 2006, another year where the Bank posted a then-record $3,549 million in net income (earnings per share were $3.55). This growth, however, came to a halt once 2008 loomed in and the global banking scene entered into turmoil. The Bank of Nova Scotia presented a 24% decrease in its net income from the previous year, totaling $3,033 million as of the fiscal year ending October 31, 2008 (earnings per share were $3.05) (Scotiabank Annual Report, 2008). The banking industry in Canada, was not completely immune to the turmoil in global banking. The Bank of Nova Scotia took a pre-tax charge of C$890 million in late 2008 on its structured finance and trading businesses, well above analysts’ estimates (Simon, 2008). The Bank’s shares have slid 5% from their record high of C$54.50 in May 2007.Furthermore, the Bank’s international operations are viewed by some as a detriment as thirty-two percent of the Bank’s net income comes from Latin America, a region where loan losses are expected to rise due to the global crisis (Racanelli, 2009). Please refer to Appendix C for additional financial information. Despite this, Scotiabank has been hit far less so than other banks, particularly less so than those from the U.S. The Bank, regarded as tight-fisted in its practices, is less exposed to assets south of the border, with no U.S. subprime residential debt. Due to its conservative practices, the Bank has managed to consistently boost its earnings and dividends for more than a decade, in part due to traditional loans. It is expected, then, that the Bank will have no need for government aid to survive, nor is it expected to take significant write-downs, rendering it capable of smoothly handling the current crisis and potentially benefitting the most once the problems subside (Racanelli, 2009). Furthermore, to boost profitability, Scotiabank can cut costs. They expect to ratchet down the bank's productivity ratio-costs as a percentage of revenue to 58% from an already stingy 59%. Such a drop would save the bank hundreds of millions of dollars (Racanelli, 2009). Conclusion The Bank of Nova Scotia has shown a progressive drive to continually improve its work environment. The company offers competitive benefits and compensation and provides a healthy atmosphere to work in. By examining the documents in Appendix D, one can conclude Scotiabank ranked above average in terms of its treatment towards employees. Based on this important factor and other factors presented in this report, it would be appropriate to conclude that the Bank of Nova Scotia would be an excellent employer for recent and future graduates of the Haskayne School of Business. References Bank of Canada. (2009). Monetary Policy. Retrieved March 10, 2009, from http://www.bankofcanada.ca/en/faq/faq_bank_monetary.html#6 Bao, J. (2008, August). Time is money. Canadian Business, 81(12/13), 14. Retrieved March 16, 2009, from ABI/INFORM Global database. Buckstein, J. (2008, September 11). Online banking faces new threats. Calgary Herald,A.16. 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