Higher provisions for credit losses, weaker capital market revenues and higher expenses on revenue growth initiatives all weighed on the Bank of Nova Scotia’s profits in the second quarter, the bank said today.
Scotiabank’s second quarter net income came in at $980 million, down 6% from the same period last year but up 18% over last quarter, it reported today.
According to the bank, diluted earnings per share (EPS) were $0.97 compared to $1.03 in the same period last year and $0.82 last quarter. Return on equity was 21.4%, compared to 22.4% last year.
“In a period when many financial institutions experienced significant problems in global and domestic capital markets, our strong risk management and moderate exposures resulted in minimal writedowns,” said Rick Waugh, the bank’s president and CEO. “Our loan portfolios performed very well with Scotia Capital showing net recoveries, and loan losses being well contained in other business lines.”
Scotiabank said it is on schedule to meet its ROE targets, its productivity ratio target of less than 57% and its capital ratio objectives. When it comes to EPS goals, however, the bank is struggling. “The challenging global financial markets continue to impact earnings and, as a result, it is unlikely that we will meet our EPS growth objective set at the end of last year,” said Waugh. “At the same time, our rebound in earnings this quarter, the continued solid asset growth in all three business lines and improved funding costs, all point to a stronger second half in 2008.”
Total revenue for the quarter was $3.27 billion, up $61 million or 2% from the same quarter last year. The bank said the increase was due to strong growth in net interest income due to broad- based asset growth, along with higher securitization and mutual fund revenues, and recent acquisitions.
This quarter’s net interest income was $1.97 billion, up $70 million or 4% over the same quarter last year. The increase, the bank said, was driven in part by strong contributions from acquisitions and robust broad-based asset growth, partly offset by a compressed margin.
Scotiabank reported that the provision for credit losses was $153 million this quarter, up $133 million from the same period last year and a $42 million increase from last quarter. It said the higher level was due to lower net recoveries in the Scotia Capital portfolio. There were higher provisions in retail and commercial portfolios in Domestic Banking and in the retail portfolios in International Banking. In addition, there was a reduction in the general allowance of $25 million last year.
Waugh added that the domestic banking platform has been performing very well in a competitive market and that the division experienced strong growth in assets, with market share gains in residential mortgages, total deposits and mutual funds.
When it comes to international banking, the bank increased its ownership in Scotiabank Peru to 98% this month and expanded into other areas such as the Cayman Islands and the Bahamas. “The combination of organic growth and contributions from acquisitions fuelled a solid year-over-year increase in earnings in International Banking,” said Waugh. “These results were achieved notwithstanding the negative impact of foreign currency translation due to the rapid rise of the Canadian dollar in 2007.”
While it’s competitors, such as TD Bank Financial and the Royal Bank of Canada continue to make concerted efforts to build business south of the border, Scotiabank has steered clear of the U.S. in favour of other international opportunities. “We’re very comfortable with our current strategy,” Waugh told analysts during a conference call this afternoon. “Our strategies are working so we’re certainly feel no compulsion at this time [to move into the U.S.].”
“Having said that, the valuations are obviously intriguing,” he added. “We’ve always been opportunistic but it is not in our strategy. We’ll keep our eyes and ears open but it’s steady as she goes for now.”
As well today, the bank announced it increased its quarterly dividend by 2¢, to 49¢ per common share. “We continue to prudently manage our capital position to ensure that it
is adequate to support strategic acquisitions and ongoing business development opportunities,” said Waugh. “Despite difficult markets, we are on track to achieve three of our four key financial and operational targets. In view of these factors and our strong and improving capital position, we increased our quarterly dividend.”
@page_break@Scotiabank’s earnings come on the heels of the Bank of Montreal’s report that its Q2 net income was down to $642 million, or $1.25 a share, compared with $671 million, or $1.31 a share, in the year ago period. BMO did not increase its quarterly dividend.