05/29/2012 07:53 EDT | Updated 07/29/2012 05:12 EDT

Scotiabank Earnings Q2 2012: Profit Falls 10 Per Cent, But Beats Street


TORONTO - Bank of Nova Scotia profits dropped nearly 10 per cent in the second-quarter, but the bank says it remains on-target to meet financial objectives for the year, helped in part by tightening expenses in some divisions.

Scotiabank said profit slipped to $1.46 billion, or $1.15 per diluted share, compared with $1.62 billion, or $1.39 per share in the year-earlier period.

That's when the bank logged non-recurring, acquisition-related gains of $286 million and foreign currency-related gains of $77 million arising from the conversion to international financial reporting standards. Together they amounted to a boost of 33 cents per share.

Scotiabank said that income grew 16 per cent year-over-year when excluding the non-recurring gains.

In the latest quarter, results were equal to $1.18 per share on an adjusted basis, which is three cents higher than the consensus estimate of analysts compiled by Thomson Reuters.

Revenue in the three-month period ended April 30 rose two per cent to $4.7 billion from $4.63 billion in the year-earlier period.

The performance "demonstrates the results of our continued focus on our ongoing revenue and cost-containment initiatives, and acquisitions in high-growth markets," president and CEO Rick Waugh told analysts in a conference call.

"Based on this good performance in the first half of the year, we are confident in achieving our financial objective."

Scotiabank turned out a better-than-expected quarter, said Brad Smith, an analyst at Stonecap Securities Research.

"Overall, this was a better than expected quarter with positive variances well distributed across segment results. Based on an initial review we see nothing unusual that would lead the market to conclude otherwise," he wrote in a note.

Scotia's shares rose 2.38 per cent, or $1.21, to close at $52, outperforming most of its peers Tuesday on the Toronto Stock Exchange.

The quarterly results were helped by a strong performance in Canadian banking operations, which posted net income of $461 million, up 23 per cent from a year earlier. The bank said its Canadian growth was driven by strength in mortgages, consumer auto and commercial loans, lower provisions for credit losses and stable expenses.

International operations also showed notable growth, up 14 per cent to $448 million, helped by strong asset and deposit growth in Latin America and Asia and from contributions from acquisitions, particularly Banco Colpatria in Colombia.

Scotiabank is looking to rein in costs at its international operations partly by cutting jobs in some countries, after it made a series of acquisitions in recent years.

"We're going through a process of branch consolidations in Chile, central America and Mexico and reducing headcount that way," said Brian Porter, head of international banking.

"Expenses again are our priority, and we expect to produce positive operating leverage this year."

Provisions for credit losses, or the money set aside for bad loans, fell to $264 million, from $270 million a year ago.

However, there was weakness in the bank's global wealth management division, which reported net income fell 40 per cent to $298 million over the same quarter last year.

Scotia said the decrease was due to last year's one-time revaluation of its original 18 per cent investment in DundeeWealth of $260 million, which was partly offset by one-time transaction and integration costs of $27 million. The bank said that profits adjusted for those one-time items actually grew by 14 per cent due to string insurance and mutual fund sales.

In its global banking and markets division, the bank saw income rise to $387 million, up three per cent from the year earlier, largely due to strong revenues, lower provisions for credit losses and reduced operating expenses.

In its other segment, which includes the group treasury, smaller operating segments and other items not included in a specific business segment, the bank took a net loss of $134 million, which included a $34-million impairment charge on investment securities and a $25-million offset to revenues.

Scotiabank's results are one of the standout banks this quarter so far, particularly because of its operations outside of North America, said Sumit Malhotra, a financial analyst at Macquarie Capital Markets.

"The diversification of Scotia is a step ahead of almost all of their peers, and to me that holds the bank in good stead as we go forward," he said in an interview.

"The trends we've seen in Canadian consumer (banking) indicate things are obviously slowing, so having a source of growth outside of that business is clearly a key differentiator."

Besides its Canadian banking business, Scotiabank has operations is 55 countries, including across Latin America and the Caribbean and employs some 75,000 workers.

Scotiabank announced last week it signed a deal to sell its landmark red skyscraper in downtown Toronto to Dundee REIT (TSX:D.UN) and H&R REIT (TSX:HR.UN) for $1.27 billion.

The sale will give Scotiabank a big infusion of cash ahead of new banking rules.

Under the incoming Basel III rules, a bank's required Tier 1 capital ratio must be at least seven per cent. The ratio of how much of the bank's assets include shareholder equity and other core capital is a key a measure of a bank's health and ability to endure downturns.

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