Scotiabank deal test of U.S. market

Article content

Bank of Nova Scotia’s recent investment in a Cleveland-based lender can help it better understand an “uncertain” U.S. market and boost profits, chief executive Scott Thomson said Tuesday after the Toronto-based bank announced third quarter results that met analysts’ estimates.

Earlier this month, Scotiabank agreed to buy 14.9 per cent of KeyCorp, which operates across 15 states, for about $3.9 billion as it looks to strengthen its North American footprint. The investment will be subject to regulatory approvals.

Article content

“It’s a low-cost, low-risk way of getting in a market that’s very uncertain right now, from a political, regulatory and economy perspective,” Thomson said on a conference call. “(It) allows us to dip our toe in the water, learn about the market and actually get the benefits … from developed market earnings over time.”

Scotiabank announced a new strategy in December that would see it allocate more capital to “stable, high-return markets” in North America. The bank’s immediate focus would be to allocate a greater share of capital to Canada as well as recycling capital from its Latin American businesses to its corporate business in the United States.

Scotia has the largest international footprint among its Canadian peers, but its businesses in Latin America have too many clients using only one banking product, Thomson said in December.

Those international operations, however, showed some strength in the three-month period that ended on July 31. Scotiabank’s international banking segmented reported adjusted earnings of about $709 million for the quarter, up ten per cent from last year due to “strong margin expansion,” the bank said.

Article content

Article content

For the quarter overall, the bank reported adjusted net income of $2.1 billion, down from $2.2 billion during the same period last year. On an earnings per share basis, that worked out to $1.63 compared to $1.72 in the previous year.

As reported, net income was $1.9 billion, down from $2.2 billion during the same period last year.

While total revenue for the quarter increased to about $8.3 billion from around $8 billion during the same period last year, the bank had to allocate a billion dollars for potential bad loans. That’s higher than the $819 million kept aside during the same quarter last year.

Despite the income decline, the results were mostly in line with analysts expectations.

“Although Scotia’s earnings were aided by a lower-than-anticipated tax rate, it posted the strongest earnings of the banks reporting to date,” Jefferies Financial Group Inc. analyst John Aiken said in a note sent to clients on Tuesday. “The bank continues to make progress on its strategic goals and remains relatively optimistic on its outlook for credit, more so than its peers.”

National Bank of Canada’s Gabriel Dechaine said in a note that the bank’s performance in Canadian banking was “solid” as it resumed mortgage loan growth for the first time in six quarters.

Article content

Thomson said that while credit costs were at the high end of the bank’s expectations, he does expect conditions to begin to stabilize in international markets in response to monetary easing.

In Canada, he expects the policy rate to be lowered gradually until the middle of next year, providing “early relief” to consumers and leading to a rebound in home and vehicle sales activity.

“This will benefit our earnings in 2025,” he said.

The bank’s shares were up about 1.9 per cent at $66.86 in afternoon trading in Toronto.

• Email: [email protected]

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

Article content