Bank of Nova Scotia reported lower fiscal third-quarter profit as it set aside more money to cover future losses on loans, with customers in Canada and Latin America feeling the strain from higher interest rates.
Scotiabank reported profit of $1.91-billion, or $1.43 per share, in the three months that ended July 31. That was down from $2.19-billion, or $1.72 per share, in the same quarter last year.
After adjusting for certain items, Scotiabank said it earned $2.19-billion, or $1.63 per share. On average, analysts expected adjusted profit of $1.62 per share, according to data from the London Stock Exchange Group.
The bank earmarked $1.05-billion of provisions for credit losses – the funds banks set aside to cover loans that could default in future – compared with $819-million in the third quarter last year.
The bank’s provisions for impaired loans, which are already past due, jumped 31 per cent higher to $970-million, as more borrowers fell behind on payments. Many of those customers were in three of Scotiabank’s key markets in Latin America: Colombia, Chile and Peru. Provisions also increased for Canadian banking clients, mostly on car loans as well as credit card balances.
The ratio of provisions to the bank’s total loan book was 55 basis points, or 0.55 per cent, which is at the high end of the bank’s guidance for the year. But the low level of provisions against performing loans that are still being repaid, at $82-million, suggests the bank expects potential losses from defaults are nearing their peak.
Scotiabank kept its quarterly dividend unchanged at $1.06 per share.
Earlier this month, after its fiscal third quarter had ended, Scotiabank announced a US$2.8-billion investment to buy a minority stake in U.S. regional bank KeyCorp., as part of a plan to boost the Canadian bank’s exposure to the American banking market. The deal surprised investors and analysts were skeptical about its merits.
On Tuesday, Scotiabank explained why it sees the investment as a better alternative to buying back its own shares. The KeyCorp stake is expected to add between $300-million to $350-million to earnings in the first year after closing. By contrast, if the bank repurchased shares, it estimates it would have lost $80-million of profit, which is roughly what it would have earned by keeping the equivalent capital invested in securities. And Scotiabank calculates that the stake in KeyCorp will add more to earnings per share and return on equity.
In Scotiabank’s Canadian banking division, profit was $1.11-billion, up 6 per cent from the same quarter last year. Loan balances were roughly unchanged, with the mortgage portfolio shrinking by 2 per cent. Deposits increased by 8 per cent, which is a strategic priority for the bank.
Profit from international banking operations, which are concentrated in Latin America, was up 8 per cent to $669-million. The profit margin on loans increased, though overall loan balances declined by 2 per cent, mostly due to falling business lending.
Wealth management had a strong quarter, with profit up 11 per cent to $408-million. Capital markets profit of $418-million fell 4 per cent year over year, with weakness in fixed-income trading activity as demand from clients was lower.
The bank’s capital reserve increased, with its common equity Tier 1 capital ratio – a measure of the bank’s resilience against shocks – rising to 13.3 per cent, from 13.2 per cent, up 0.6 per cent from a year earlier.
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