Scotiabank falls short of expectations despite Q2 net income gain

The Bank of Nova Scotia reported second-quarter net income of $2.26 billion, up from $2.18 billion a year earlier, helped by its earnings from its international footprint, but fell short of expectations as loan loss provisions jumped.

The Toronto-based lender’s earnings for the three-month period ended April 30 amounted to $1.73 per diluted share, compared with $1.70 a year earlier.

Adjusting for items such as costs related to various acquisitions in recent months, Scotiabank’s profit amounted to $2.26 billion for its second quarter, up from $2.19 billion during the same period in 2018.

That amounted to adjusted earnings per diluted share of $1.70, down from $1.71 a year ago.

Scotiabank’s earnings fell short of the $1.74 expected by analysts, according to Thomson Reuters Eikon.

The bank’s provisions for credit losses, or money set aside for bad loans, amounted to $873 million during the quarter, up from $534 million a year earlier. This figure, however, includes Day 1 provisions for credit losses related to Scotiabank’s recent acquisitions in Peru and the Dominican Republic as required by accounting rules. Adjusting for this, the bank’s provisions for credit losses amounted to $722 million.

“Overall, we delivered solid results across the bank in the second quarter,” Scotiabank chief executive Brian Porter said in a statement.

“We have made good progress towards strengthening our businesses and offering a superior customer experience. Looking ahead, we remain focused on delivering against our differentiated strategy and achieving consistent long-term growth.”

The lender’s Canadian banking division posted net income of $1.05 billion, up 3% from $1.02 billion during the second quarter of 2018. After adjusting for acquisition-related costs, net income was $1.06 billion, up 4%. The bank said the uptick was due largely to higher revenue driven by loan and deposit growth and the impact of acquisitions. This was partly offset by higher non-interest expenses and higher provision for credit losses, among other things.

Its international banking division generated net income of $769 million, up 3.2% from $745 million a year earlier. After adjusting for acquisition and divestiture related costs, the division’s net income amounted to $787 million, up 15% from a year ago.

Scotiabank, which has invested heavily in its footprint across Latin America, said the growth was driven by higher net interest income due to strong loan growth in the Pacific Alliance countries of Chile, Colombia, Mexico and Peru, as well as the impact of acquisitions and higher non-interest income. However, this was offset by higher non-interest expenses and higher provisions for credit losses, among other things.

Scotiabank’s global banking and markets arm, however, reported net income of $420 million for the quarter, marking a 6% drop from $447 million a year earlier. The bank said this stemmed from lower net-interest income, higher non-interest expenses and lower recovery of provisions for credit losses. This was partially offset by higher non-interest income, the favourable impact of foreign currency translation and lower income taxes.

The bank’s common equity tier one capital ratio, a key measure of its financial health, was at 11.1% as of April 30. This was in line with the prior quarter, but down from 12% during the second quarter of 2018.

The earnings miss was driven by higher provisions for credit losses, which were higher than expected, said Gabriel Dechaine, an analyst with National Bank of Canada Financial Markets.

Scotiabank’s international business growth was good, but underlying growth in its domestic personal and commercial banking arm was flat, he added.

“Capital markets earnings growth was negative, though trading and advisory revenues exceeded our forecasts,” he said in a note to clients.