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

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The Bank of Nova Scotia (BNS - Free Report) reported third-quarter fiscal 2018 (ended Jul 31) results before the opening bell. Adjusted net income for the quarter came in at C$2.3 billion ($1.8 billion), up 7% year over year. Results exclude acquisition-related costs.

A rise in revenues and fall in provisions largely drove improvement in results, which was partially offset by elevated expenses. Improvement in capital and profitability ratios was impressive.

Revenues Rise & Provisions Fall, Partially Muted by Elevated Expenses

Total revenues came in at C$7.2 billion ($5.5 billion) in the quarter, up 4.3% year over year. This upswing stemmed from rise in net interest as well as non-interest income.

Net interest income came in at C$4.1 billion ($3.1 billion), up 7.9% from the prior-year quarter. Stellar growth in residential mortgages, business loans and personal loans in Canadian Banking, commercial and retail lending in International Banking, along with elevated treasury assets and corporate loans in Global Banking and Markets, led to this upside.

Non-interest income inched up 1.3% from the year-ago quarter to C$3.1 billion ($2.4 billion). Elevated banking and credit card fees, trading revenues, brokerage revenues, income from associated corporations and acquisitions primarily led to the upsurge. These increases were partly mitigated by reduced gains on the sale of real estate and investment securities, negative impact of foreign-currency translation and lower wealth-management fees due to the sale of the HollisWealth business in 2017.

Adjusted non-interest expenses were C$3.7 billion ($2.8 billion), rising 1.9% year over year. Elevated investments in technology and regulatory initiatives, higher business taxes, acquisitions, and other business growth-related expenses led to the rise. This upsurge was partly offset by the impact of the HollisWealth business sale, reduced share-based payment costs, advertising and business development spending, along with favorable movement of foreign-currency translation, and benefit from cost-reduction initiatives.

Adjusted provision for credit losses was C$539 million ($413.3 million), down 5.9% year over year. The fall mainly resulted from lower provisions in Canadian Banking, along with Global Banking and Markets, partially offset by higher provisions in International Banking.

Improving Balance Sheet

As of Jul 31, 2018, Scotia Bank’s total assets were C$946.7 billion ($727.1 billion), up 4.5% from the prior-year quarter. Net Customer Loans and Acceptances were up 11.2% from the year-ago quarter to C$567.5 billion ($435.9 billion). Deposits came in at C$654.2 billion ($502.4 billion), increasing 5.8% year over year.

Healthy Capital and Profitability Ratios

As of Jul 31, 2018, Common Equity Tier 1 ratio came in at 11.4% compared with 11.3% as of Jul 31, 2017. Further, total capital ratio came in at 14.5% compared with 14.8% in the prior-year quarter.

Return on equity for the reported quarter came in at 13.1% compared with 14.8% in the year-earlier quarter.

Our Viewpoint

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

Bank of Nova Scotia (The) Price, Consensus and EPS Surprise

Bank of Nova Scotia (The) Price, Consensus and EPS Surprise | Bank of Nova Scotia (The) Quote

 

Scotia Bank currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Competitive Landscape

UBS Group AG (UBS - Free Report) reported second-quarter 2018 net profit attributable to shareholders of CHF 1.28 billion ($1.30 billion), up around 9% from the prior-year quarter. Results displayed rise in net fee and commission income (up 2% year over year) and strong capital position. However, the quarter reflected elevated expenses and lower net interest income (down 30%).

Deutsche Bank AG (DB - Free Report) reported net income of €401 million ($467 million) in second-quarter 2018, which tanked 13.7% from year-ago quarter. Income before income taxes plunged 13.5% year over year to €711 million ($828.1 million). Lower revenues and higher expenses were the key undermining factors. Moreover, provisions for credit losses increased. Notably, net asset outflows were recorded during the quarter. Nevertheless, strong capital position was a positive.

Itau Unibanco Holding S.A. (ITUB - Free Report) posted recurring earnings of R$6.4 billion ($1.78 billion) in second-quarter 2018, up 3.2% year over year. Including non-recurring items, net income came in at R$6.2 billion ($1.72 billion), up 3.3% year over year. Results display higher revenues, lower provisions and a solid balance-sheet position. Nonetheless, elevated expenses and reduced managerial financial margin were headwinds.

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