Scotiabank Q4 earnings rise 15%

By Joseph Dussault, general editor of Bizweek TORONTO — Even the average Canadian can’t seem to escape from blistering internet speeds. Scotiabank, Canada’s third-largest bank, reported a fourth-quarter net income that rose by 15…

Scotiabank Q4 earnings rise 15%


By Joseph Dussault, general editor of Bizweek

TORONTO — Even the average Canadian can’t seem to escape from blistering internet speeds.

Scotiabank, Canada’s third-largest bank, reported a fourth-quarter net income that rose by 15 percent, boosting its dividend for the second time in five months. The result also marked the bank’s first quarter in which its U.S. operations produced the same amount of profit as its global retail banking division. In the three months ended July 31, Scotiabank earned C$1.1 billion, or C$1.27 a share, compared with C$906 million, or C$1.02 a share, a year earlier.

“We have made great progress executing our vision for a digitally inclusive world. Digital transformation is a key component of that transformation and we are driving our digital efforts ahead of schedules,” CEO Brian Porter said in a statement.

Scotiabank is shifting to reduce capital allocation to its Canadian consumer business, which accounts for 50 percent of total earnings. As a result, the company said in June that it would pull out of the Canadian auto finance and leasing business and sell its U.S. credit card business to Canadian Imperial Bank of Commerce. After the announcements, the bank lowered its earnings growth forecast to the mid-single-digit range.

In the U.S., the bank last year agreed to pay $2.7 billion to settle U.S. federal and state charges that it had bilked American consumers by allowing foreign customers to make excessive charges on credit cards and opened domestic accounts under fake names. The Bank of Nova Scotia has said it plans to sell its insurance division, currently the bank’s biggest source of profits.

The financial system is being reshaped by pressures from digital technology, but consumers’ familiarity with technology has been one of the biggest impediments. Few Canadians are willing to dump their devices for something more tactile and hands-on, Porter has said. As he told Bizweek earlier this year, “the least personalized relationship you can have with a bank is your phone.”

Despite the decision to keep its U.S. credit card business, Scotiabank last month said it would sell its U.S. auto finance arm to General Motors Financial for C$5.2 billion.

The bank has been aggressively pursuing artificial intelligence and automation, launching a Smart Investment Bank in 2016 and acquiring bank apps developers Drivy and Qx for about $100 million last year. It had reported negative returns on many its capital investments over the past several years, but Porter has said that it will be successful if it can generate “almost zero” negative returns in the medium term.

For this quarter, Scotiabank is raising its dividend by a penny to 49 cents a share, which translates to an annual dividend of C$2.25 a share. The hike marked the bank’s second increase in the past six months.

Morningstar’s Liz Gannes called Scotiabank’s operating earnings per share — which measure income without some one-time items — “solid” but noted that it was “hard to see how an improved consumer credit result can help offset challenges” related to lower oil prices and “lower economic activity in China and other emerging markets.” In a research note, she also noted that Scotiabank’s U.S. diversification is a “fading factor” and that investors should focus on efforts to reduce its capital allocation risk, which could result in C$0.25 per share in annualized savings in 2018.

“Now that some of its large U.S. assets are being sold, Scotiabank is focused on driving efficiency and ROE on its remaining Canadian operations while also reducing its exposure to oil-sensitive domestic banking clients,” analysts Ryan Nash and Victor Wang wrote in a note to clients.

By Joseph Dussault, general editor of Bizweek

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