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Noah Zivitz

Managing Editor, BNN Bloomberg


Bank of Nova Scotia’s shares sank the most in more than two years Tuesday, as a key measure of its profitability slipped, while its bottom line was weighed down by a downturn in capital markets activity and a jump in loan loss provisions.

The bank said it had $2.59 billion in net income in the three-month period that ended July 31, compared to $2.54 billion a year earlier. On an adjusted basis, it earned $2.10 per share; analysts, on average, anticipated $2.11 in adjusted earnings per share. 

Its shares closed 5.25 per cent lower, and were the biggest drag on the S&P/TSX Composite Index. It was the biggest single-day drop for the bank’s stock since March 27, 2020, back when the onset of the pandemic was shaking global markets.

Profit from Scotia's Canadian banking unit climbed 12 per cent year-over-year to $1.21 billion, as higher rates boosted its net interest income and as loan growth jumped 14 per cent from a year earlier.

Just like analysts anticipated heading into the quarter, Scotia set aside more funds for loans that could eventually go bad. In the Canadian division alone, it booked $93 million in provisions; by contrast, it released funds from its provisions in each of the previous three quarters.

Across the entire institution, Scotia booked $412 million in provisions for credit losses, compared to $219 million in its fiscal second quarter.

The bank's international unit provided the most profit growth in the latest quarter, as net income in that unit spiked 29 per cent year-over-year to $625 million. However, the unit’s net interest margin, which measures the difference between how much a bank generates from interest on loans versus how much it pays in interest, dipped to 3.85 per cent from 3.86 per cent in the previous quarter.

Similarly, Scotia’s bank-wide net interest margin (NIM) was trimmed to 2.22 per cent in its third quarter from 2.23 per cent in the prior and year-ago quarters.

“Although (NIM) compression was minor, it was a disappointment in an environment of material central bank rate hikes,” Gabriel Dechaine, an analyst at National Bank of Canada Financial Markets, wrote in a report to clients.

The slight reduction in margins also caught the eye of Alexander Yokum, who covers the bank at CFRA Research and downgraded Scotia to hold from buy, while pointing to expenses rising at a faster rate than revenue.

Meanwhile, the slowdown in capital markets activity that analysts predicted came to fruition in the latest quarter, as net income in Bank of Nova Scotia's global banking and markets unit sank 26 per cent year-over-year to $378 million. Revenue from Scotia's capital markets operations tumbled 30 per cent to $423 million.

“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,” stated John Aiken, Barclays’ head of research in Canada, in a note to clients.

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