Scotia Bank's (BNS) Q3 Earnings Fail To Cheer Investors

The Bank of Nova Scotia (TO:BNS) lost nearly 1% on NYSE since the company declared its fiscal third-quarter 2016 (ended Jul 31) results on Tuesday, before the opening bell. Net income for the quarter came in at C$2.0 billion ($1.5 billion), increasing 6.1% year over year.

A rise in revenues was partly offset by higher operating expenses and provisions. Improvement in capital and profitability ratios was impressive. However, this was not enough to win investors’ confidence.

During the reported quarter, Canadian Banking, International Banking,and Global Banking and Marketssegments’ net income reported year-over-year rise of 8%, 9% and 12%, respectively; while net income from Other segment reported a year-over-year plunge of 74%.

Revenues, Expenses & Provisions Depict a Rise

Total revenue was C$6.6 billion ($5.1 billion), up 8.4% year over year. Higher revenues were driven by a rise in net interest income as well as non-interest income.

Net interest income came in at C$3.6 billion ($2.8 billion), up 7.4% year over year. Non-interest income was C$3.0 billion ($2.3 billion), up 9.7% year over year.

Non-interest expenses were C$3.5 billion ($2.7 billion), up 5.1% year over year.

Total provision for credit losses was C$571 million ($441 million), up 19% year over year. The rise was mainly attributable to higher provisions in the International Banking segment as well as Canadian Banking retail portfolios. Further, higher Global Banking and Markets segment's provisions related to energy exposures drove the increase.

Strong Balance Sheet

As of Jul 31, 2016, Scotia Bank’s total assets were C$906.8 billion ($695 billion), up 1.3% sequentially. Consumer loans and acceptances were up 1.3% from the prior quarter to C$483.2 billion ($370 billion). Deposits came in at C$631.3 ($484 billion), up 3.6% sequentially.

Healthy Capital and Profitability Ratios

As of Jul 31, 2016, Scotia Bank's Common Equity Tier 1 ratio came in at 10.5%, expanding10 basis points (bps) year over year. Further, Total capital ratio came in at 14.1%, compared to 13.5% in the prior-year quarter.

Return on equity for the reported quarter came in at 14.8%, up 10 bps year over year.

Dividend Hike

Concurrent with the earnings release, Scotia Bank announced a 2.8% hike in its quarterly dividend to C$0.74 per share. The dividend will be paid on Oct 27 to shareholders of record as on Oct 4.

Our Viewpoint

A diversified product mix and strong capital position will help Scotia Bank grow organically as well as through acquisitions. Further, the export-driven economy of Canada is expected to benefit from gradual recovery of the U.S. economy. However, a persistent low interest rate environment along with stringent regulatory reforms, keep us skeptical about the company’s sustainable growth in the long term.

BANK OF NOVA SC Price, Consensus and EPS Surprise

Scotia Bank currently sports a Zacks Rank #1 (Strong Buy).

Performance of Other Foreign Banks

Mitsubishi UFJ Financial Group Inc. (NYSE:MTU) reported profits attributable to owners of parent of ¥188.9 billion ($1.75 billion) for the first quarter (ended Jun 30) of fiscal year ended Mar 31, 2017, down 32% year over year.

The Royal Bank of Scotland (LON:RBS) Group plc (TO:RBS) reported second-quarter 2016 loss attributable to its shareholders of £1.08 billion ($1.55 billion). The company had posted a profit of £280 million in the prior-year quarter.

Deutsche Bank AG (NYSE:DB) reported net income of €20 million ($22.6 million) in second–quarter 2016, significantly down on a year-over-year basis. Income before income taxes came in at €408 million ($460.7 million), plummeting 66.8% year over year.

Confidential from Zacks

Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>