Scotia Bank's (BNS) Q3 Earnings Impressive, Costs Escalate

The Bank of Nova Scotia (TSX:BNS) reported third-quarter fiscal 2019 (ended Jul 31) adjusted net income of C$2.5 billion ($1.9 billion), up 9% year over year. Results exclude acquisition- and divestiture-related costs.

Increase in revenues, along with strong capital and profitability ratios, was the driving factor. However, escalating expenses and provisions were on the downside.

Revenues Rise, Partially Muted by Elevated Expenses & Provisions

Total revenues came in at C$8 billion ($6 billion) in the quarter, up 11.1% year over year. This upswing stemmed from rise in net interest as well as non-interest income.

Net interest income came in at C$4.4 billion ($3.3 billion), up 7.3% from the prior-year quarter. Non-interest income climbed 16.1% from the year-ago quarter to C$3.6 billion ($2.7 billion).

Adjusted non-interest expenses came in at C$4.1 billion ($3.1 billion), rising 10.8% year over year.

Adjusted provision for credit losses was C$713 million ($536.7 million), up 32.3% year over year. This upside mainly resulted from higher provisions in Canadian Banking and International Banking.

Improving Balance Sheet

As of Jul 31, 2019, Scotia Bank’s total assets were C$1.07 trillion ($0.81 trillion), up 12.7% from the prior-year quarter. Assets under administration were up 13% from the year-ago quarter to C$547.9 billion ($415.2 billion). Deposits came in at C$722.3 billion ($547.4 billion), increasing 10.4% year over year. Total loans were C$603.2 billion ($457.1 billion), up 6.3% year over year.

Healthy Capital and Profitability Ratios

As of Jul 31, 2019, Common Equity Tier 1 ratio came in at 11.2% compared with 11.4% as of Jul 31, 2018. Further, total capital ratio came in at 14.8% compared with the prior-year tally of 14.5%.

Return on equity for the reported quarter came in at 11.5% compared with the year-earlier quarter’s 13.1%.

Our Viewpoint

A diversified product mix and strong capital position will help Scotia Bank grow organically, as well as through acquisitions. Though mounting expenses is a concern, the export-driven economy of Canada will likely benefit from gradual recovery of the U.S. economy, in turn, aiding the company’s sustainable growth over the long run.

Scotia Bank currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Competitive Landscape

Royal Bank of Canada’s (NYSE:RY) third-quarter fiscal 2019 (ended Jul 31, 2019) net income was C$3.3 billion ($2.5 billion), up 5% from the prior-year quarter. The bank witnessed higher revenues and a strong capital position in the quarter. Notably, growth in loans and deposit balances were positives. However, rise in expenses and higher provisions adversely impacted results to some extent.

Canadian Imperial Bank of Commerce’s (TSX:CM) third-quarter fiscal 2019 (ended Jul 31) adjusted earnings per share were C$3.10, up 1% from the year-ago reported figure. Results were driven by increase in non-interest income and net interest income. Also, rise in loans and deposits acted as a tailwind. Nonetheless, significant rise in provisions and higher operating expenses were the undermining factors.

HSBC Holdings (NYSE:HSBC) recorded second-quarter 2019 pre-tax profit of $6.2 billion, up 4% year over year. Results benefited from an improvement in revenues. Additionally, a slight decline in operating expenses acted as a tailwind.

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