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May 28, 2019

Scotia Q2 profit misses estimates as loan loss provisions rise

Scotiabank shares fall after earnings miss


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Bank of Nova Scotia (BNS.TO) reported earnings that missed analysts’ estimates as higher provisions for loan losses tied mainly to takeovers hurt results in the fiscal second quarter.

Canada’s third-largest lender by assets set aside more money for soured loans in its Canadian banking and international divisions, leading to a 63 per cent jump in provisions across the bank. Provisions for credit losses were higher than analysts’ estimates at $873 million, including $151 million tied to takeovers in Peru and the Dominican Republic.

Even excluding acquisition-related provisions, Scotiabank is the only lender among the big Canadian banks that have disclosed results to show further credit erosion from the industry’s unexpected surge in loan losses in the previous three months. Scotiabank set aside $688 million for bad loans in the first quarter and $534 million a year earlier, the Toronto-based bank said in a statement Tuesday.

“Scotia’s earnings were negatively affected by provisions related to acquisitions which, from our standpoint, generated the miss,” Barclays Plc bank analyst John Aiken wrote in a note to clients. “We believe that Scotia’s underlying performance appears to be quite strong and should be rewarded.”

Scotiabank shares fell 2.1 per cent to $69.11 at 9:45 a.m. in Toronto, their biggest decline in intraday trading in two weeks.

Net income for the three months through April 30 rose 3.8 per cent to $2.26 billion, or $1.73 a share, with adjusted per-share earnings of $1.70 missing analysts’ estimates by four cents.

“This was a better quarter in many ways” compared with a “weak” first quarter, CIBC Capital Markets analyst Robert Sedran said in a note to clients, adding that earnings were still “below our estimates, this time owing to modestly higher loan losses (including on performing loans) and higher expenses.”

Flurry of Deals

Scotiabank spent about $7 billion on five deals in the past year, including buying a 68 per cent stake in a Chilean lender and acquiring Canadian money managers Jarislowsky Fraser and MD Financial Management. While Canadian banking remains Scotiabank’s largest division, the international operations -- driven by Chief Executive Officer Brian Porter’s Latin America focus -- now account for 34 per cent of the bank’s overall net income.

Scotiabank saw its biggest earnings gain in its international banking division, with a 3.2 per cent increase in profit to $769 million, while Canadian banking earnings, which include wealth management, climbed 3 per cent to $1.05 billion. Those gains countered the six per cent earnings decline from a year earlier in its global banking and markets division.

Porter said in Tuesday’s earnings call that he expects financial performance to improve in the second half, due to further contributions from recent takeovers, growth in international banking and stronger second-half performance in Canadian banking and capital markets, along with expense management and solid capital ratios.

Scotiabank’s productivity is already showing signs of improvement after previously being hurt by last year’s acquisition spree. The company’s productivity ratio -- or expenses as a percentage of revenue -- improved to 51.8 per cent in the second quarter from 54.9 per cent in the previous three months.