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Noah Zivitz

Managing Editor, BNN Bloomberg


Bank of Nova Scotia's shares tumbled the most since March 2020 on Tuesday after its latest results caught investors by surprise.

From a marginal erosion in profitability (its net interest margin (NIM) slipped 1/100th of a point), to a jump in credit loss provisions, and a downturn in its capital markets business — there were several setbacks in the quarter.

However, it was the stumble in the bank's international business that sparked the most concern, as non-interest income fell, and margins contracted.

Several analysts who cover Scotia downgraded shares in the aftermath of the results. Here's a snapshot of what some of them stated in notes to clients.

"Our thesis on International is not panning out. ... In our view, with more modest NIM expectations, rising provisions for credit losses, and more uncertainty regarding the Pacific Alliance economies (and even the North American economies), we see downside risks to our estimates," Darko Mihelic of RBC Capital Markets stated.

Mihelic downgraded Scotia to sector perform from outperform and cut his price target to $83 from $94.

"Despite positive trends in the quarter, we expect International Banking earnings to remain relatively stable over the medium term with loan growth and margin expansion offset by an increase in provisions for credit losses," Nigel D'Souza of Veritas Investment Research stated.

He downgraded Scotia to reduce from buy, and cut his valuation to $80 per share from $87, which he attributed to a more muted outlook for net interest income.

"Revenue in 2022 has been severely impacted by non-interest income, which in [the third quarter] fell to its lowest level since 2018 as challenging market conditions severely impact capital markets revenue. ... Credit risk quality remained excellent with both gross impaired loans and net write-offs falling quarter-over-quarter and year-over-year. Despite the credit strength, [Scotia's] hefty exposure to Latin America gives us pause as recessionary fears rise," said Alexander Yokum of CFRA.

Yokum downgraded Scotia to hold from buy, and cut his price target to US$63 from US$74.

“While the quarter itself was not the trigger (for the downgrade), the complexities in forecasting some key income statement drivers (e.g., NIM; liability-sensitive nature of the balance sheet) leads us to conclude that investor risk appetite is unlikely to be supportive of relative re-rating of the forward price-to-earnings valuation (key ingredient of our outperform thesis) in the foreseeable future,” stated Sohrab Movahedi from BMO Capital Markets.

He changed his recommendation on Scotia's shares to market perform (the equivalent of a hold), and maintained a price target of $95 per share.

Despite Movahedi's view that investor risk aversion will keep a lid on Scotia's shares, he said the stock's dividend yield (~5.5 per cent) will limit downside potential.

“Most concerning was the bank's International Banking segment, which had an underwhelming top-line … And while we continue to have a positive view on the longer-term growth potential of the Latin American business, which is poised for a stronger [2023 fiscal year], we believe the less robust near-term outlook for International limits [Scotia’s] upside relative to peers for the time being,” wrote Mike Rizvanovic, an analyst at Keefe, Bruyette & Woods, in a note to clients.

He downgraded the stock to market perform from outperform and trimmed his price target to $84.00 per share from $86.00.