Noah Zivitz

Managing Editor, BNN Bloomberg

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Bank of Nova Scotia kicked off earnings season for Canada's Big Six lenders by handily beating profit expectations amid a sharp drop in funds set aside for loans that could go bad.

Scotia said Tuesday its fiscal fourth quarter net income was $1.9 billion, compared to $2.3 billion a year earlier. On an adjusted basis, it earned $1.45 per share. Analysts, on average, expected $1.22.

In a potentially encouraging signal about credit quality trends amid the second wave of COVID-19, the bank booked $1.13 billion in provisions for credit losses during the three months ending Oct. 31. While that was a 50-per-cent increase from a year earlier, it was a significant decline from the $2.18 billion that had been set aside in the previous quarter.

“[It was] a much better-than-expected quarter for Bank of Nova Scotia albeit one that was almost exclusively driven by lower loan losses. However, from an earnings power perspective, we were alarmed by the bank’s sizable (seven per cent) decline in pre-tax, pre-provision earning, which we expect will become an increasingly important metric for shareholders as we look ahead to fiscal 2021 and beyond,” Credit Suisse Analyst Mike Rizvanovic wrote in a note to clients.

Scotia's core Canadian banking operations struggled in the quarter compared to the same time in 2019, with revenue falling four per cent year-over-year and adjusted profit sliding 13 per cent. The bank pointed out its net interest income came under pressure because of the Bank of Canada's rate cuts. On a sequential basis, the unit’s profit surged 81 per cent.

The bank's sprawling international operations rebounded in the quarter as adjusted profit hit $353 million from just $4 million in the fiscal third quarter.

Scotia's other primary operating units – wealth management and global banking and markets – each delivered year-over-year growth in adjusted profit.

"As we look forward to 2021, we will continue to put customers first and we remain cautiously optimistic that better times lie ahead as we continue to grow our presence as a leading bank in the Americas," said CEO Brian Porter in a release.