BNS beats expectations, yet may disappoint

Fickle investors are expected to react poorly to Bank of Nova Scotia results that beat expactations.

Scotiabank posted a quarterly profit of 87 cents a share on Tuesday, as the last of Canada's big banks reported financial results for the last three months of 2009. Analysts had forecast the bank would earn 85 cents.

Despite the seemingly solid results, analyst John Aiken at Barclays Capital said in a report early Tuesday that Scotiabank will face market headwinds. This issue boils down to the quality of the bank's earnings: Scotiabank didn't exceed expectations with the kind of profits that the Street expected.

The same scenario played out on Friday at Royal Bank of Canada: The country's largest bank reported better-than-expected earnings, but saw its shares sell off on concerns over the sustainability of its performance.

"While Scotiabank did come in above consensus, it was on the back of significantly lower than anticipated provisions for credit losses," said Mr. Aiken. "Ironically, this could weigh on the bank's valuation."

"In this environment, the market may believe that the provisions are insufficient to cover off future deterioration and may anticipate elevated levels in future quarters," said the Barclays analyst. He added: "The fact that earnings were essentially in line with expectations, despite the lower than anticipated provisions aiding earnings (against consensus' estimates) by $0.08 per share, highlights that other areas in Scotia's operations were weaker than the Street had forecast."

Mr. Aiken expects analysts will lower their forecast earnings for Bank of Nova Scotia after this quarter.

"As with Royal Bank's results, we fear that the market may not view Scotiabank's earnings as being as positive as hoped for based on the strong results reported previously by the other banks," said Mr. Aiken.