Tuesday, May 30, 2006

Scotiabank Q2 2006 Earnings

The Globe and Mail, Sinclair Stewart, 30 May 2006

Bank of Nova Scotia has always been fond of flaunting its reputation as the country's most global bank, and yesterday it offered some compelling numbers by way of justification: It now employs more people in its international operations than it does in its entire Canadian retail and brokerage division.

Recent acquisitions in Peru and El Salvador, coupled with continued expansion in the Caribbean and Mexico, boosted Scotiabank's international work force by 20 per cent during the second quarter to 22,249 positions.

That compares with 21,045 staff in domestic banking and wealth management.

More importantly for investors, however, is that Scotiabank's foreign push is beginning to demonstrate some significant financial results.

The international unit posted record results yesterday, accounting for nearly one-third of the bank's bottom line and driving an 8-per-cent gain in overall profit.

Scotiabank's profit climbed to $887-million or 89 cents a fully diluted share from $822-million or 81 cents in the same three months of 2005. The bank also increased its quarterly dividend by 3 cents a share to 39 cents.

"We had a very strong quarter," Scotiabank chief executive officer Rick Waugh told analysts during a conference call. Mr. Waugh was on the phone from Costa Rica, where he and other members of the board are spending three days touring the bank's Central American holdings. They were hosting the President of Costa Rica last evening, and are meeting with the President of El Salvador today.

Mr. Waugh said the bank has a strong pipeline of potential acquisition opportunities in the Americas, although he said he feels no urgency to buy his way into the U.S. market.

Instead, the bank will look to bolster its presence in some of its existing markets, in part by opening new branches. The bank intends to add more than 50 domestic branches by the end of 2007, 100 in Mexico, and an additional 50 in countries where it has smaller presences.

The international division made $268-million in the quarter, up 44 per cent from a year ago. Scotiabank's Mexican unit, Inverlat, along with its long-standing Caribbean locations, accounted for the bulk of the earnings, but the bank also received a lift from recent purchases.

Rob Pitfield, who heads the unit, credited new contributions from Peru, El Salvador, and Chile for helping to drive the improvement. However, he said sales practices put in place some time ago are now beginning to pay off across the network, and assured analysts the results this quarter are not a fluke.

Scotiabank's performance beat analysts' profit expectations by about 6 cents a share, yet there were some lingering questions about the quality of its results. For one thing, the bank enjoyed an unusually low tax rate of about 18 per cent. It also benefited from very low loan-loss provisions in its international division and at Scotia Capital Inc., the investment banking arm. In fact, Scotia Capital booked loan-loss recoveries of $54-million.

When these items were stripped out, analysts said the bank essentially met expectations. The bank's shares gained 1.8 per cent or 75 cents before closing at $43.65 on the Toronto Stock Exchange: a gain that may reflect more on the stock's recent sluggishness than it does on the financial results. Scotiabank shares have lost more than 5 per cent since the beginning of the year.

"The stock is so inexpensive that even okay numbers are good enough right now," explained Mario Mendonca, an analyst with Genuity Capital markets in Toronto.

Scotiabank's provisions for soured loans were just $35-million this quarter: Unchanged from a year ago, but down considerably from the $75-million recorded in the first quarter of this year.

Scotia Capital had a solid quarter, with profit rising 15 per cent to $276-million. Trading results were better than last year, although they couldn't keep pace with the torrid numbers posted in the first quarter of 2006.

The retail bank's profit was up 6 per cent to $296-million, although it fell more than 11 per cent from the first quarter.

The bank has been aggressively pursuing new customers on the retail side, and said it now has the third-largest share of mortgages and deposits in the country.

Bloomberg, 29 May 2006

Bank of Nova Scotia, Canada's third- largest bank, said profit climbed for the 12th straight quarter to a record, led by its bank units in Latin America. The stock had its biggest one-day jump since September after profit topped estimates.

Second-quarter net income rose 8.2 percent to C$894 million ($808 million), or 89 cents a share, from C$826 million, or 81 cents, a year earlier, the Toronto-based bank said today. Revenue for the period ended April 30 climbed 5.3 percent to C$2.83 billion.

Earnings from international banking climbed 44 percent to an all-time high of C$270 million, on higher profit from the Caribbean, Mexico and Peru. Scotiabank has spent more than $1 billion since 2000 to expand abroad to counter slowing growth at home, after the federal government banned mergers among Canadian banks.

International banking is ``a really bright spot for Scotia, and something that differentiates it from their Canadian peers,'' said Tom Kersting, an analyst at Edward Jones in Des Peres, Missouri, who rates the bank ``hold.''

Scotiabank completed a C$390 million purchase of two banks in Peru in March to create the third-biggest bank in that country. The company also owns Grupo Scotiabank, the sixth- largest bank in Mexico.

Shares of Scotiabank rose 88 cents, or 2.1 percent, to C$43.78 at 3 p.m. in trading on the Toronto Stock Exchange. The stock is down 5.1 percent this year, the worst performer among the country's six biggest banks.

Investment Banking

Profit from investment banking rose 15 percent to C$277 million, as the bank joined Bank of Montreal and Royal Bank of Canada in reporting a surge in trading revenue this quarter. Trading volume on the Toronto Stock Exchange has risen by more than a third in the first four months of the year after commodity stocks soared.

Domestic consumer banking profit rose 6.4 percent to C$298 million, boosted by higher deposits, as well as mortgage and credit card fees.

The bank was expected to earn 82 cents a share, according to the median estimate of seven analysts polled by Bloomberg.

Scotiabank boosted its dividend 8.3 percent to 39 cents a share, the fourth increase in eight quarters. The bank set aside C$35 million for bad loans, unchanged from the previous year. That's less than the C$85 million estimate from CIBC World Markets analyst Darko Mihelic.

Other Banks

Scotiabank is the fifth of Canada's eight publicly-traded banks to report second-quarter results. Bank of Montreal said earnings climbed 7.3 percent to C$644 million, or C$1.24 a share. National Bank of Canada said profit climbed 5.9 percent to C$214 million, or C$1.26 a share, while Toronto-Dominion Bank said earnings rose 23 percent to C$738 million, or C$1.01 a share.

Royal Bank of Canada, the country's No. 1 bank, said on May 26 that earnings climbed 23 percent to C$1.12 billion, or 85 cents a share, as trading revenue climbed to a record. Royal Bank, National Bank and Bank of Montreal also topped analysts' profit estimates, and Toronto-Dominion missed.

Canadian Imperial Bank of Commerce, Laurentian Bank of Canada and Canadian Western Bank are scheduled to release results this week, with CIBC reporting June 1.