Surging profit from key international markets helped Bank of Nova Scotia to robust second-quarter results, and the lender is now casting around for possible acquisitions that could reinforce its presence in Latin America.
With adjusted profit up 11 per cent, Toronto-based Scotiabank churned out solid results in Canadian banking, as its outlook for the domestic economy brightens. Profit from capital markets swelled as loan loss provisions from the energy sector continue to shrink.
Yet the story of Scotiabank's growth is still largely written in its international footprint – the key feature that distinguishes the bank from its peers. Fears that U.S. President Donald Trump could upend decades of trade policy and tangle supply chains have weighed on projections for economic growth in Latin America, compounding fears that Scotiabank's loan growth could turn choppy. So far, the bank appears to have sidestepped any pitfalls, and executives continue to show confidence in the region.
Scotiabank is Canada's fourth major lender to surpass second-quarter forecasts, with Bank of Montreal posting the lone narrow miss among the Big Five. National Bank of Canada, the sixth-largest lender by assets, is scheduled to report results on Wednesday.
"We delivered strong results in the first half of the year, and expect this momentum to continue in the second half of 2017," said Brian Porter, the bank's chief executive officer.
Referring specifically to operations in Mexico, Peru, Chile and Colombia, Mr. Porter added: "We continue to see great short- and long-term potential across our Pacific Alliance countries."
Profit in the international division rose 19 per cent from the same quarter last year, to $595-million, on the strength of higher net-interest margin and lower provisions for credit losses – the money banks set aside to cover bad loans. And Scotiabank's international-loan book grew 3 per cent year over year, and 4 per cent from the prior quarter.
"Look at indicators like car loans, retail sales in stores – all these indicators are showing good trends. Business confidence is also strong," said Ignacio Deschamps, Scotiabank's head of international banking. "And quite frankly, although there is a lot of media attention on potential changes of U.S. trade policy, the reality day-to-day in the companies, in credit demand, is really strong."
The bank's common equity Tier 1 capital ratio – one measure of financial health – rose to 11.3 per cent from 11 per cent a year ago, which "puts it at the top of the industry," according to National Bank Financial Inc. analyst Gabriel Dechaine.
With healthy capital reserves on hand, Mr. Porter is open to making acquisitions "over the course of the next year." And though he promised to stay "very disciplined," he said "there will be opportunities, both in Canada and internationally, that we'll look at."
Just this week, Scotiabank struck a deal to sell its Malaysian banking subsidiary for about $340-million, and has said it would consider offers for its business in Thailand. The proceeds could be redeployed in Canada or in Latin America.
The bank's chief financial officer Sean McGuckin told reporters that the bank's priority is still to grow organically. But he said it "would be helpful" if Scotiabank could boost its market share in Mexico or Chile from the current 6-per-cent range to 10 per cent or above.
"There are not a lot of opportunities that come up to purchase," Mr. McGuckin said. "Rest assured, when they do come up, we do look at them."
Growth was more subdued at home, where Scotiabank's profit in Canadian banking fell 1 per cent to $971-million, compared with a year ago. However, adjusting for gains on real estate sales, profit was up 5 per cent for the quarter, and executives struck an optimistic note.
"For the past several months, our macroeconomic view of Canada has been getting more and more favourable," said Canadian banking head James O'Sullivan.
Scotiabank earned a total of $2.06-billion or $1.62 a share, in the quarter that ended Apr. 30. That was up sharply from $1.58-billion or $1.23 a in the second quarter of 2016, when results were hampered by a $278-million after-tax restructuring charge.
Adjusting to exclude the charge, Scotiabank's profit reached $1.63 per share, beating the consensus expectation of $1.56 among analysts polled by Bloomberg.
Provisions for credit losses decreased 22 per cent from last year to $587-million, due partly to lower commercial provisions in the energy sector. But the bank's provisions increased 6 per cent from the first quarter, due largely to "a few commercial accounts in Puerto Rico and Brazil."
Lower loan losses helped lift capital markets profit 60 per cent higher than a year ago, to $517-million, and the equities, fixed-income, and U.S. lending businesses also performed better.
The bank held its quarterly dividend steady and announced plans to buy back up to 2 per cent of its outstanding common shares.