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Aug 30, 2016

Scotiabank hikes dividend as lower loan losses help drive profit beat

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Bank of Nova Scotia continued the winning streak among Canada’s largest banks this earnings season, reporting upbeat results and showing a sharp decline in energy-related loan losses.

Scotiabank, Canada’s third largest lender by assets, reported a profit of more than $1.9-billion, up 6 per cent, in its fiscal third quarter.

After making some one-time adjustments, the bank’s profit was $1.54 a share, topping analysts’ expectations of $1.48 a share and making Scotiabank the fifth consecutive bank this reporting season to exceed estimates.

Scotiabank also raised its quarterly dividend by 2 cents a share, to 74 cents.

“Our profitable businesses combined with our strong capital ratios positions the bank well to make the necessary investments to better serve our customers, grow our businesses and continue to create value for our shareholders,” Brian Porter, Scotiabank’s chief executive officer, said in a statement

Scotiabank demonstrated a notable improvement in its energy related loans, which had been a concern in recent quarters because of the bank’s relatively high exposure to the sector, which has struggled after a two-year slump in oil prices.

Scotiabank set aside $37-million to cover bad loans to energy companies in the third quarter, down from $150-million in the second quarter.

The decline, Mr. Porter noted, “is consistent with our previously stated expectations that energy losses had peaked during the last quarter.”

The bank’s exposure to the energy sector also declined slightly, to $16.1-billion in loans, or 3.3 per cent of total loans. That is down from $16.3-billion in energy loans last quarter and 3.4 per cent of total loans, but remains higher than its peers.

The lender said that 52 per cent of its loans to the energy sector are investment grade, which is consistent with most of its peers.

The total amount of money set aside to cover bad loans also declined, to $571-million, down $181-million from the previous quarter.

National Bank of Canada, another lender with a relatively high exposure to the energy sector, will conclude the earnings season for the big banks on Wednesday.

A modest rebound in oil prices, to levels above $45 (U.S.) a barrel, has removed much of the anxiety surrounding bank loans to the sector. Last week, Royal Bank of Canada, Canadian Imperial Bank of Commerce and Toronto-Dominion Bank also set aside less money in the third quarter to cover bad loans, bolstering their profits.

All five banks that have reported results so far this reporting season have beaten analysts’ expectations, driving shares higher and removing some of the skepticism that has followed banks as they face challenges related to the weak Canadian economy, low interest rates and indebted consumers.

Scotiabank’s Canadian retail banking division reported a profit of $930-million, up 8 per cent over last year. Its international banking division – which is now focused on the Pacific Alliance countries of Mexico, Peru, Chile and Colombia – reported a profit of $527-million, up 9 per cent.

Global banking and markets, which includes capital markets, reported a profit of $421-million, up 12 per cent and in line with the double-digit gains reported by most of Scotiabank’s peers.

“Overall, a solid results punctuated by improving profitability in international and continued momentum in domestic retail,” John Aiken, an analyst at Barclays, said in a note.