Bank of Nova Scotia Earnings: Results Starting To Improve

Narrow-moat-rated Bank of Nova Scotia BNS reported improving fiscal third-quarter results. Expenses were roughly flat sequentially, better than the previous trend of increases, and revenue managed to grow sequentially, driven by fees and net interest income. Not all Canadian banks have increased their NII in the current quarter, so we view this as a positive sign. With results coming in as we expected, we will maintain our CAD 72/$54 fair value estimate. We await an updated strategy refresh for the bank, which will likely result in additional repositioning charges and new operational targets, so the next chapter for Scotiabank is still in its early stages.

Revenue came in at CAD 8.1 billion, up 2% sequentially as NII and fees increased. This was as we expected. Further, the increase in NII is not being driven by mortgage loan growth, as the bank has dialed back its exposure here—a trend we like, given the current rate and credit backdrop in Canada. Scotiabank has one of the more conservative amortization and loan/value profiles in its mortgage book. We think this will serve the bank well as credit is generally trending toward increased stress for the industry as the next credit cycle develops. Net write-offs, provisioning, and reserves were all up in the quarter. Delinquencies also rose in the international and domestic portfolios. While we expect credit costs to keep increasing, we project Scotiabank will be able to handle it.

The bank’s international exposure helped drive preprovision operating income growth in the quarter, although provisioning is increasing for the international segment as Chile and Colombia come under intensifying economic pressure.

We expect net interest margin compression to slow or stop in the next quarter or two and Scotiabank to be able to generate additional revenue growth. Meanwhile, the trajectory of expenses should become more clear after the bank gives a strategy update.