Narrow-moat-rated Bank of Nova Scotia (BNS) reported OK fiscal second-quarter results. Expenses kept increasing at a healthy rate, outgrowing revenue in the quarter, however, management struck a positive tone in the call, suggesting this pattern may begin to reverse for the rest of the year. Expenses came in a bit ahead of our previous expectations, and as we adjust our forecasts we anticipate a mid-single-digit percentage decline in our current fair value estimates of $75. It remains difficult to predict the bank’s future expense levels as we await an updated strategy, which could result in additional repositioning charges.
The Bank announced a quarterly dividend increase of 3 cents to $1.06 per share.
Revenue came in at $7.93 billion, down 1% sequentially, as net interest income declined while fees remained relatively flat. We would not be surprised if net interest income started to achieve growth once again for the rest of the year as moderate balance sheet growth combines with steady to slightly improving net interest margins. We would also hope for slightly lower sequential expense growth for the rest of the year, helping improve profitability.
Risks within the mortgage industry are increasing for the Canadian economy and for the banks. Higher interest rates are increasing the rates paid on mortgages when they reach their renewal date, and for mortgages that haven’t reached renewal, amortization periods are being extended.
Scotiabank does score better than peers on this front. As of April 30, less than 1% of the bank’s mortgages have an amortization period greater than 30 years, compared with over 30% for some peers. Even so, unless rates are cut materially in the medium term, financial stress is going to begin increasing for a large percentage of the Canadian population. We still do not think this will break the Canadian banks, but slower growth and potentially some losses are likely in the future. Relatedly, Scotiabank hinted that their mortgage growth in Canada will be minimal for the rest of the year.