UPDATE: This article includes additional details from Scotiabank's third-quarter earnings call.
The Bank of Nova Scotia's third-quarter profit slid as the Canadian lender set aside money to cover potentially troubled loans, but executives pointed to signs that consumer health is stabilizing.
Toronto-based Scotiabank, which
The decline follows tepid economic growth in Canada, where consumers have pulled back more than in the U.S. and unemployment has risen quicker.
Scotiabank stashed away more funds to guard against potential credit losses, with provisions rising 28% to CA$1.05 billion from the year-ago quarter. Scotiabank increased its cushion for impaired loans due to more stress in international banking retail portfolios, mostly in Colombia, Chile and Peru, and in Canadian auto loans and credit cards.
The picture looked better when compared with three months ago, with provisions staying flat in both its Canadian and international retail businesses.
"We remain confident in our clients' resilience as central banks continue managing inflation across our footprint," Philip Thomas, the bank's chief risk officer, told analysts on an earnings call Tuesday.
The Federal Reserve
Rate cuts will "serve as a tailwind" for customers as their interest costs decline, Thomas said, though he noted they've been able to absorb high borrowing costs relatively well.
"I continue to be impressed by how resilient the Canadian consumer has been," Thomas said, pointing to the "finally stable" figures in auto loan write-offs as an example.
He added: "Have we turned a corner? I mean, one quarter is not a trend, but I'm really encouraged by what I'm seeing."
The Canadian bank division brought in CA$1.1 billion in profits, up 6% from the same quarter a year earlier. Its international banking division saw its profits rise 7.7% to CA$660 million.
John Aiken, an analyst at Jefferies, wrote in a note to clients that the quarter was roughly on track with expectations. Increased provisions lowered its profitability, but Scotiabank "managed to earn through" it with the help of a lower effective tax rate, Aiken wrote.
By contrast, Aiken downgraded his outlook of Bank of Montreal from "buy" to "hold" on credit concerns. BMO Financial Group nearly doubled its provisions for credit losses in the third quarter.
Scotiabank executives have eyed the U.S. market as an opportunity for more profits. After the quarter ended, Scotiabank said it would buy an almost 15% stake in KeyCorp for about $2.8 billion in a step into the U.S. consumer banking market.
The deal with KeyCorp was seen as a cautious way of bolstering its U.S. presence, in contrast with other Canadian banks that have acquired U.S. branch networks through purchasing banks.
Scott Thomson, Scotiabank's president and CEO, said Tuesday that the KeyCorp deal was a "low-cost, low-risk approach" to deploying some of its excess capital in the U.S. while valuations are favorable.
KeyCorp was among the regional banks whose stock prices fell during last year's crisis, as investors focused on the Cleveland-based bank's
Some investors have appeared skeptical about the KeyCorp transaction, since Scotiabank could return some of its spare capital to shareholders through buying back shares.
But Thomson said Scotiabank "evaluated a range of capital deployment options" and found the KeyCorp investment significantly more attractive. A presentation slide that the company prepared for investors quantified the benefit, showing an expected 0.45% increase in return on equity compared with a 0.25% return from share buybacks.
Adjusting for the divestiture of CrediScotia Financiera, amortization of acquisition-related intangible assets and a CA$176 million legal provision in Peru, Scotiabank's third-quarter earnings were CA$1.63 a share. Analysts polled by S&P Capital IQ had expected CA$1.62 a share.
Scotiabank agreed to sell CrediScotia Financiera, a wholly owned consumer finance subsidiary in Peru, to Banco Santander during the third quarter. The Canadian bank said it recognized an impairment loss of CA$143 million in non-interest income and a credit of CA$7 million in non-interest expenses.
