The Bank of Nova Scotia missed expectations in the second quarter as it was hit with a double-digit increase in expenses and put aside more cash for loans potentially going sour if the economic picture darkens.

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Scotiabank misses expectations on higher loan-loss provisions, but hikes dividend Back to video

Scotiabank’s net income fell over 20 per cent to $2.16 billion for the three months ending April 30 as compared to the same period last year. On an adjusted basis, the bank’s profit fell to $2.174 billion, or $1.70 per share from $2.18 per share this time last year. Bloomberg analysts had been expecting $1.76 per share.

Despite the miss, the bank, the first of the Big Six to report earnings, showed it was relatively unscathed by the banking crisis that hit the United States in March, disclosing strong deposit growth and raising its quarterly dividend.

“Despite the challenging market conditions this quarter, the bank delivered resilient operating performance reflecting the stability of our business model while absorbing the impact of elevated funding costs and higher operating expenses,” said Scott Thomson, Scotiabank chief executive, during a May 24 conference call.

Thomson added that the events in the U.S. and European banking sectors underscored the stability and security of Canada’s banking system and that the bank maintained a stable deposit balance during the crisis.

Scotiabank chief financial officer Raj Viswanathan said the bank’s customer deposits have outpaced loan growth, rising by 11 per cent since last year, driven by a 15 per cent increase in personal deposits.

Executives also assuaged analyst concerns over commercial real estate risks, which have become a bigger theme south of the border. Thomson said residential and industrial segments comprise 75 per cent of the bank’s commercial real estate portfolio while the office segment, which is under pressure to the effects of the work-from-home shift, makes up less than 10 per cent.

However, concerns that the economic picture was getting cloudier prompted the bank to increase its provision for credit losses — the funds banks set aside to cover potentially bad loans — to $709 million, compared to $219 million in the same quarter last year. Those provisions were largely tied to corporate and commercial portfolios as well as more challenging high-inflation market conditions in Chile and Colombia, the bank said.

Scotiabank’s Canadian banking segment posted adjusted profit of $1.06 billion for the quarter compared to about $1.18 billion in the same period last year, weighed down by higher provisions for credit losses and higher non-interest expenses.

Adjusted profit in the international banking business was also held back by higher credit loss provisions, shrinking to $673 million in the second quarter from last year’s $689 million. The bank added that pre-tax, pre-provision earnings increased due to strong loan growth and net interest margin expansions.

Profit in Scotiabank’s global wealth management business fell to $362 million on an adjusted basis from $415 million a year earlier, while adjusted earnings in global banking and markets was also down to $401 million from $488 million in the year-ago period.

Scotiabank’s capital equity tier 1 ratio, which compares a bank’s capital against its risk-weighted assets to gauge its resilience, stood above the regulatory 12 per cent requirement at 12.3 per cent. The bank also increased its dividend by three cents to $1.06 per share.

Canadian loan growth was flat at six per cent year over year while commercial loans rose by 18 per cent year over year and mortgages eked out a three per cent gain from last year, but slipped one per cent quarter over quarter. On the conference call, Thomson had identified mortgages as a laggard, noting that with the exception of Canadian mortgages, the bank expects modest quarter over quarter loan growth for the rest of the year.

National Bank analyst Gabriel Dechaine pointed to higher expenses, which he noted grew by 10 per cent year over year, as the key factor driving the earnings miss.

Like Dechaine, Barclays analyst John Aiken also flagged the impact of expenses, saying in his May 24 note that a modest increase in costs pulled earnings in the domestic banking segment down compared to the first quarter.

“We do not believe that Scotia leading off second quarter earnings season with a miss will necessarily be well received, as it saw sequential declines in all of its segments and higher provisions,” Aiken said. “However, we do point to the ongoing growth in international, driven by strong loan growth and additional improvements to net interest margin.”

Aiken added that the international business offset some of the slowdown happening in the domestic lending book. He also noted that Scotia’s ability to keep up with the regulatory capital buffer while announcing a three per cent increase to its dividend was a positive.

Shares of Scotiabank were trading close to flat at $66.27 at midday in Toronto.

• Email: shughes@postmedia.com | Twitter: StephHughes95