Scotiabank rises as international lending drives profit

TORONTO Tue May 29, 2012 4:51pm EDT

A customer walks into the Scotiabank on Spring Garden road in Halifax, Nova Scotia, March 3, 2009. REUTERS/Paul Darrow

A customer walks into the Scotiabank on Spring Garden road in Halifax, Nova Scotia, March 3, 2009.

Credit: Reuters/Paul Darrow

TORONTO (Reuters) - Bank of Nova Scotia's (BNS.TO) quarterly operating profit rose 16 percent, topping estimates, on strong growth in international banking profits and domestic loans, Canada's No. 3 bank said on Tuesday.

Shares of Scotiabank, the fourth Canadian bank to report in what has been a mixed earnings season so far, rose 2.4 percent on the results, which analysts said were strong across all the bank's business lines.

"A great core business performance justifies the premium valuation for the bank," said Peter Routledge, an analyst at National Bank Financial.

Net income for the bank's second quarter, ended April 30, fell 10 percent as year-before results were boosted by non-recurring foreign currency and acquisition-related gains of C$363 million.

But operating profit rose 16 percent to C$1.46 billion ($1.43 billion) or C$1.15 a share, the bank said, while adjusted profit was C$1.18 a share, topping analysts' expectations of C$1.15.

"While we do not characterize it as a blow-out quarter, based on what we have seen to date from its peers, it is positive," Barclays Capital analyst John Aiken said in a note.

MIXED RESULTS

Canadian banks have mostly struggled with slowing domestic loan growth this quarter, leading to mixed results.

But Scotiabank's profit from its Canadian consumer banking unit jumped by 23 percent from the previous year to C$461 million, as expenses were flat while residential mortgages grew by 7 percent.

Mortgage growth has become a point of concern for the domestic banking sector, as Canadians struggle under record high debt loads, while government-led moves to tighten mortgage rules are seen letting some of the air out of the housing market.

The bank also received a boost from its international operations, which are spread through Latin America and parts of Asia.

International banking profit rose 14 percent to C$448 million, on asset and deposits growth, and contributions from Scotiabank's acquisition of a majority stake in Colombia's Bank of Colpatria, which closed in January.

Scotiabank paid about $1 billion for a 51 percent stake in Colpatria, one of a series of acquisitions it has made since the 2008 financial crisis.

The bank is currently working to close a C$719 million purchase of a 20 percent stake in China's Bank of Guangzhou. It March it agreed to buy privately held U.S. energy investment bank Howard Weil, which will boost its oil and gas equity presence.

Speaking on a conference call, international banking head Brian Porter said the bank was focusing on controlling costs in its international division, and would shut some branches in Mexico, Chile, and Central America.

"We're managing headcount aggressively," he said.

CAPITAL REQUIREMENTS

Scotiabank has continued to expand its operations despite strict new "Basel III" capital standards that banks are expected to begin phasing in next year.

The bank has been seen as lagging its rivals in the rush to post a Tier 1 common equity ratio of 7 percent under Basel III by early 2013.

Scotiabank agreed last week to sell its main Toronto office tower for C$1.27 billion, which should give it some breathing space on capital levels.

It said it expects the ratio to be in the range of 7 percent to 7.5 percent by the first quarter of 2013 when factoring in the impact of the building sale, which has not yet closed.

Routledge said the sale of the building should resolve any concerns the market may have about the bank's equity levels.

"Once they close the sale of the head office, they're not a laggard," he said.

Global wealth management profit fell by 40 percent to C$298 million as the year-before result was boosted by a C$260 million gain related to its acquisition of the 82 percent of wealth management company Dundeewealth that Scotiabank did not already own.

Scotia said the price paid for the stake forced it to revalue its original 18 percent investment upward.

Global banking and markets income rose 3 percent to C$387 million.

Scotiabank's share rose C$1.21 to C$52.00 on the Toronto Stock Exchange.

(Additional reporting by Euan Rocha and Andrea Hopkins; Editing by Janet Guttsman)

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