Narrow-moat Bank of Nova Scotia (BNS), or Scotiabank, reported fiscal third-quarter results that came in a bit under CapIQ consensus expectations. Adjusted diluted EPS was down 45% year over year, coming in at $ 1.04 per share. For comparison, peer bank BMO reported a decline in EPS of 23% year over year. Preprovision pretax profits still held up reasonably well, down 3% year over year, however, provisioning remained elevated, increasing from secondquarter levels. Third-quarter provisioning was $ 2.2 billion, compared with $ 1.8 billion last quarter and a more normalized pre-coronavirus run rate of roughly $ 500 million to $ 700 million per quarter in 2018 and 2019. The bank’s common equity Tier 1 ratio increased to 11.3% this quarter from 10.9% last quarter, as earnings slightly outpaced dividends and lower risk-weighted asset amounts helped the ratio improve.
The big question for all the banks remains the future trajectory of credit costs. This question is even more complex for a bank like Scotiabank with its broader international operations. We had already expected another large reserve build in the current quarter and lower provisioning going forward, and management reiterated this outlook, calling the current quarter the likely high-water mark for provisioning. There is, of course, a high degree of uncertainty here and this will be dependent on the path of the virus and the economy. The adjusted return on equity came in at roughly 8% for the quarter, still down from pre-COVID-19 levels, but also not terrible, all things considered. All segments remained profitable, in line with management’s expectations, although international banking only barely remained profitable during the quarter.
Based on these results, we don’t expect to materially change our fair value estimate for Scotiabank, which is currently $70 (US$ 50) per share.
