The Bank of Nova Scotia posted double-digit profit gains in the second quarter in large part due to record earnings from its international operations, momentum that the lender expects to continue for the rest of the year.
Scotiabank’s international segment reported net income of $595 million, up 19 per cent from the same quarter last year, nearly double the rate of adjusted net income growth for the bank as a whole.
Chief executive Brian Porter said Tuesday the Pacific Alliance countries of Mexico, Peru, Chile and Colombia — a trade bloc where Scotiabank has invested heavily, aiming to capitalize on the relatively low banking penetration rates in these emerging markets — continue to have “great short and long-term potential” for the bank.
Even in Mexico, amid worries over the Trump administration’s push to renegotiate the North American Free Trade Agreement, Scotiabank saw 22.3 per cent growth in net income during the past quarter, compared to a year ago.
“There has been no near-term impact whatsoever,” said Sean McGuckin, Scotiabank’s chief financial officer, on a call with reporters. “Mexico is one of our strongest growth markets in our international footprint this past year, and we continue to see very good growth there. High retail confidence, employment is strong. And don’t forget, when the U.S. does better — and we’re starting to see some signs of that — Mexico will also do better.”
Canada’s third-biggest lender held its Common Equity Tier 1 (CET1) ratio — a closely watched capital measure — at 11.3, among the highest of the big Canadian banks. That gives Scotiabank what Porter called “optionality” to either invest in organic growth, return capital to shareholders, or potentially make acquisitions — likely away from home.
“From time to time, we’ll look at acquisitions that are on strategy, and we think fit in nicely with our business.… I would suspect more opportunities in the international footprint over the course of the next year,” Porter told analysts on a conference call.
Mexico and Chile, where Scotiabank currently has about 6 per cent market share, would be good candidates for beefing up its presence organically, added McGuckin.
“Getting (those markets) around 10 per cent, or north of 10 per cent would be helpful,” he told reporters. “And again, adding bit more scale. But, we are not relying on growing our business on the acquisitions. We strongly believe we’ve got the right business model, we’re making the right investments in the business to participate in the good economic growth in these markets.”
Scotiabank was the last of Canada’s Big Five lenders to post strong profit growth for the fiscal quarter ended April 30, despite lingering worries about escalating housing prices and increasing consumer debt burdens in the domestic market.
“While real estate gains may notionally take some of the luster off the results, Scotia still did better than forecast with results in International a stand-out, a distinct positive given that these operations are the bank’s key differentiator,” said John Aiken, an analyst with Barclays in Toronto, in a note to clients. “We view this momentum quite favourably and believe that Scotia’s results merit positive relative performance against its peers.”
The bank reported net income of $2.061 billion, up 30 per cent from a year earlier. After adjusting for a restructuring charge last year, the net income gain was 10.7 per cent. Scotiabank also reported adjusted diluted earnings per share of $1.62, up 15 per cent from a year earlier and ahead of the $1.56 expected by analysts. Last week, Bank of Montreal, Royal Bank of Canada, Canadian Imperial Bank of Commerce and Toronto-Dominion Bank all reported adjusted earnings per share gains, year-over-year, in the 10 to 12 per cent range.
Scotiabank has the biggest international footprint among the big Canadian lenders and benefitted from the exposure as the economy slows at home.
Its Canadian banking segment saw net income of $971 million, a decrease of $6 million or 1 per cent over the same quarter last year. After adjusting for a one-time gain, net income increased $94 million or 11 per cent, of which 6 per cent was due to higher gains on the sale of real estate.
Still, its outlook for Canada is “improving” said Scotiabank’s group head of Canadian banking, James O’Sullivan. Expense control will continue to be important for the domestic segment, but the lender doesn’t foresee any more restructuring charges like one it took year ago, he added.
“With each passing month over the past several months, our macro economic view of Canada has been getting more favourable,” he said. “And so, our outlook for the Canadian banking division would be for very much solid growth.”
Meanwhile, the bank is shrinking its footprint in another international market. On May 26, Cathay Financial Holding Co. Ltd. announced a proposed transaction to buy The Bank of Nova Scotia Berhad, Scotiabank’s Malaysian unit, for 1,096 million Malaysian Ringgit or roughly US$255 million, according to a regulatory filing in Taiwan.
“We’ve been refining our Asian strategy over the last couple of years.… Malaysia was not a key element in that strategy,” McGuckin said Tuesday.
The lender continues to have investments in Thailand, on which it continues to make a good return, he added.
“But if the right opportunity came or the right offer came at a very good price we would look at potentially disposing of that and redeploying that capital more in the Pacific Alliance or Canada.”