Canada's most internationally diversified bank found a surprisingly strong source of growth closer to home.
In its fiscal second-quarter results, Bank of Nova Scotia's Canadian banking operations turned heads among analysts with impressive profit growth and a rare instance of a bank reporting higher margins on its loans.
"We have a diversified platform and different businesses grow at different rates, depending on the economic environment," said Sean McGuckin, Scotiabank's chief financial officer.
Scotibank concluded the reporting season for the big banks on Friday, with profit of $1.8-billion, or $1.42 a share, up 2 per cent from last year.
The results were slightly ahead of the average analyst estimate of $1.39 a share.
But the bank's Canadian operations, which include personal and commercial banking along with wealth management, stood out. Earnings rose 9 per cent over last year, after adjusting for certain factors such as the sale of its stake in CI Financial Corp. last year.
Just as impressive, net interest margins – effectively, what the bank earns on loans – expanded by 10 basis points to an industry-leading high of 2.26 per cent, according to Peter Routledge, an analyst at National Bank Financial. (A basis point is 1/100th of a percentage point.)
The rise follows Scotiabank's shift in its asset mix from low-yielding mortgages to higher-yielding areas such as credit cards, commercial loans and auto loans.
As the market for new mortgages slows down, Scotiabank is following through on its efforts begun last year to double the size of its credit-card business, which has trailed its banking peers, over five years.
Mr. McGuckin said 30 per cent of the bank's customers now have a Scotiabank credit card in their wallets, up from 25 per cent last year, but still well behind the 40-per-cent average of its peers.
"It really is about targeting our own customers," he said. "We know their credit profile, they will have deposits with us, they may have mutual funds, they may have a car loan – so we know their financial position."
Scotiabank's international operations, which include a large market share in the Pacific Alliance countries of Mexico, Peru, Colombia and Chile, looked relatively weak by comparison, as earnings fell 1 per cent.
"As we have indicated in recent quarters, we expect strong [profit] growth from international banking in the second half of this year and we remain confident in that outlook," Brian Porter, Scotiabank's chief executive officer, said in a conference call with analysts.
In particular, he pointed to expected asset growth in Latin America, an adjustment to central bank interest rate cuts in 2014, stable expense and loss rates, and an earnings tailwind from stable or improving currencies.
Darko Mihelic, an analyst at RBC Dominion Securities, upgraded his recommendation on Scotiabank shares to "outperform" from "sector perform" and boosted his price target to $70 from $66 – offering a rare instance of rising sentiment among bank analysts during this earnings season.
"In our view, the international segment is poised for better growth going forward as the restructuring initiatives materialize into a lower sustainable expense base," Mr. Mihelic said in a note.
The bank said that it will buy back up to 24 million of its own shares, starting next week, representing about 2 per cent of its outstanding shares.
The shares rose 1.3 per cent, to $65.40, in Toronto on Friday afternoon, diverging from other Canadian bank stocks that fell sharply with disappointing economic news.
Statistics Canada reported that the country's gross domestic product shrank by 0.6 per cent at an annualized rate in the first three months of the year, down significantly from the fourth quarter's 2.2-per-cent growth.
