Scotiabank profits rise, but boosts credit loss provision on ‘less favourable’ economic outlook

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Bank of Nova Scotia’s net income jumped from last year to $2.59 billion in the third quarter, largely fuelled by growth in its international and Canadian banking segments, while it shored up provisions for credit losses at the same time.

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Adjusted earnings rose four per cent year over year to $2.10 per share in the three months ending July 31 — analysts had been expecting $2.11 per share — but it slipped quarter over quarter from the $2.76 billion recorded in the three months ending April 30.

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The bank’s global banking and capital markets segment fell 26 per cent to $378 million as global market turmoil hit revenues.

“Strong personal, commercial and corporate banking activity resulted in another quarter of solid earnings in a period where market-sensitive businesses were challenged globally,” said Scotiabank chief executive Brian Porter during the Tuesday morning earnings call.

“Asset growth of 13 per cent year over year and strong credit quality, combined with prudent expense management, positions the bank well for continued earnings growth. The macro-economic backdrop of our key geographies remains positive as economies begin to stabilize following a unique confluence of circumstances.”

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Scotiabank’s earnings in its international banking business jumped 28 per cent to an adjusted net income of $625 million on higher net interest income, loan growth and expense management. The bank added that earnings in this segment benefited from lower income taxes and credit-loss provisions.

During the conference call, Scotiabank chief financial officer Raj Viswanathan attributed much of the growth to a recovery in the Caribbean and Central America, though he noted that lower trading income from Peru and Chile contributed to the overall decline in non-interest revenue abroad.

Scotiabank boosted its ownership of its Scotiabank Chile unit when it struck a deal to purchase the remaining 16.8 per cent stake from Grupo Said in late February.

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Earnings at Scotiabank’s Canadian banking segment grew 12 per cent year over year on net interest income growth to $1.21 billion, fuelled in large part by a 14 per cent boost in both loan and net interest margin growth.

“In Canada, we see the strength of the labour market as an important counterbalance to the impact of inflation and consumer confidence,” Porter said on the call.

A shared expectation among analysts leading into earnings season was that the Bank of Canada’s rate hikes would help fuel the net interest margin expansion among Canadian banks.

The bank’s provisions for credit losses, a measure that assesses how much is set aside for loans that may not be repaid in full, stood at $412 million in the third quarter, up from $219 million in the second quarter.

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The bank noted its credit-loss ratio rose nine basis points quarter over quarter due to a “less favourable macroeconomic forecast” and lower performing releases in the last quarter.

Analysts characterized the results as a modest miss against expectations. Scott Chan, analyst at Canaccord Genuity Group Inc., pointed to lower non-interest income, which was hit by lower capital markets and wealth management revenue, as the reason for the miss.

John Aiken, head of research and senior analyst at Barclays, said markets will focus on the slight miss and uncertain economic outlook.

“Scotia kicked off the third-quarter reporting season with a modest miss against expectations,” Aiken said in a note following the results. “Overall, it was not a bad quarter, but we believe that the market’s focus will be on the headline miss and investors will be looking ahead to the uncertain outlook against the backward-looking growth generated in the third quarter.”

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Shares of Scotiabank came under pressure during trading on Tuesday, slipping more than five per cent from the market’s open to around $76.60 by 2 p.m. EST.

Despite falling just shy of expectations, Porter remained optimistic about how the bank would fare in the months ahead.

“Overall, we are pleased with our Q3 results, and believe the bank is very well-positioned from a risk management perspective, and continue to execute on long-term oriented growth strategies regardless of volatility in markets and a more variable near-term economic outlook,” he said.

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