EUR 850.00 For Business Accounts Only

Morningstar | Surge in Expenses Leads to Negative EPS Growth for Scotiabank in First Quarter

Narrow-moat Bank of Nova Scotia, or Scotiabank, reported fiscal first-quarter results which were likely weaker than most expected. Due to a combination of multiple factors, expenses came in quite high compared with first-quarter 2018, up 19%, and as a result adjusted net income was down 3% and diluted EPS was down 6%. These results are not quite as bad as they may initially seem on the surface, as Scotiabank is in the middle of multiple acquisition integrations that were expected to dilute earnings over the medium term, and there were also accounting changes that did not help, either. That said, we believe current results underscore our previous view that Scotiabank has paid up for some of its acquisitions, and the bank is in the midst of quite a bit of change, which will make it difficult to gain momentum in the short to medium term. Overall, these results fit within our fundamental long-term outlook for the bank, and we do not plan any material changes to our fair value estimate of CAD 77 (USD 58) per share.

Firmwide revenue was up 7% year over year, mostly due to acquisitions. However, growth was relatively lackluster in Canadian Banking, with revenue up 3%, while a weaker trading environment caused Global Banking and Markets revenue to drop 10%. The one bright spot was the International Banking segment, where revenue was up 22%, due to 29% growth for loan balances. This was again largely influenced by acquisitions. The growth in Canada was particularly disappointing given the investments in MD Financial as well as Jarislowsky Fraser. We will be keeping a close eye on this segment as these wealth management-focused initiatives continue to play out. Management believes that the current increase in expenses should moderate over the course of the year, and hopefully with the recovery in markets at the beginning of calendar 2019, these more asset- and market-sensitive units will begin to see a recovery in revenue growth.

Credit quality generally remained solid. PCL and NCO ratios both ticked up slightly in the quarter, but this was largely due to mix changes and acquisition related movements. Delinquencies remained largely stable across the board. The bank did grow Canadian mortgage loans at a 3% clip year over year, faster than some peers, and management expects to maintain that rate for 2019. Even so, Scotiabank remains one of the least exposed among peers to the Canadian real estate market.