Noah Zivitz

Managing Editor, BNN Bloomberg

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Bank of Nova Scotia opened earnings season for Canada's Big Six on Wednesday with a beat and a dividend hike as profit climbed in all its major divisions other than capital markets.

Scotia said its net income in the fiscal second quarter, which ended April 30, rose to $2.75 billion from $2.46 billion a year earlier. On an adjusted basis, Scotia earned $2.18 per share; the average estimate among analysts tracked by Bloomberg was for $1.97 in adjusted per-share earnings.

The bank also announced its quarterly dividend will rise to $1.03 per share from $1.00, effective July 27.

"Continued loan growth of 13 per cent, an improving net interest margin, strong customer balance sheets, combined with prudent expense management, positions the Bank well to grow its earnings," said Brian Porter, Scotia's president and chief executive officer, in a release.

Profit in Scotia's core Canadian banking division soared 27 per cent year-over-year to $1.18 billion in the latest quarter. Credit quality was a swing factor compared to a year earlier, as Scotia released $12 million from the unit's provisions for loan losses in the most recent quarter; a year earlier, it booked $145 million in new provisions for loans that could go bad.

Scotia said it had an average of $271.8 billion in residential mortgages on its Canadian loan book during the fiscal second quarter, up almost three per cent from the prior quarter.

Growth in Scotia's international division was even more pronounced, as net income surged 44 per cent year-over-year to $605 million as provisions for loan losses fell and revenue climbed.

Scotia's Global Banking and Markets division was a profit drag, as net income slumped six per cent year-over-year to $488 million, which the bank attributed to higher non-interest expenses and lower non-interest income.

In a report to clients after the results were released, Barclays Analyst John Aiken said he doesn’t think Scotia will be an outlier with the profit slump in its capital markets business.

However, Aiken did flag that the drop in Scotia’s Common Equity Tier 1 capital ratio to 11.6 per cent from 12.0 per cent in the previous quarter might not sit well with investors.

“The only real knock on the results will likely be Scotia’s lower-than-peer regulatory ratio, which was drawn down again from share repurchases. While we believe that [Scotia] is heading towards a much more efficient capital level, the market does not like outliers, particularly where capital and an uncertain outlook is concerned.”