Bank of Nova Scotia T.BNS

From RBC

[Al42]

EQUITY RESEARCH QUICK TAKE
RBC Dominion Securities Inc.
Darko Mihelic, CFA (Analyst)
[phone], [e-mail]
May 28, 2024
The Bank of Nova Scotia
Operating leverage, stable credit quality and solid capital
TSX: BNS | CAD 65.59 | Sector Perform | Price Target CAD 64.00
Sentiment: Positive
BNS’s adjusted EPS of $1.58 was essentially in line with our estimate of $1.59 and above consensus of $1.56. On a segmented
basis, better than expected results in International Banking were somewhat offset by weaknesses in Canadian Banking and
Corporate.
Pre-provision pre-tax earnings (PPPT) on a teb basis came in at $3,658 million (down ~3% QoQ but up ~5% YoY), better than our
estimate of $3,536 million and consensus of $3,612 million.
Total revenues of $8,347 million (down ~1% QoQ but up ~5% YoY) were higher than our forecast of $8,237 million. Non-interest
income was $3,653 million, above our forecast of $3,624 million. Core net interest income was $4,756 million (down ~2% QoQ
but up ~4% YoY) versus our estimate of $4,627 million. We calculate that the core all-bank net interest margin (NIM) excluding
trading expanded 4 bps QoQ to 1.68%, versus our estimated 1.63%.
Non-interest expenses of $4,693 million (down 0.6% QoQ) were lower than our estimate of $4,720 million and the adjusted
efficiency ratio was 56.2% (up 20 bps QoQ), a stronger result than our estimate of 57.3%.
Total provisions for credit losses (PCLs) were $1,007 million, lower than our expectation of $1,042 million and consensus of $1,022
million. Total PCLs were lower than we expected due to lower than expected PCLs on stage 3 (impaired) loans of $975 million (up
~4% QoQ) versus our $1,011 million forecast. PCLs on stage 1 and 2 (performing) loans were $32 million (up ~60% QoQ), in line
with our estimate of $31 million but below consensus of $51 million.
International Banking earnings of $677 million (down ~10% QoQ but up ~5% YoY) were higher than our estimate of $565 million.
Better than expected earnings were primarily due to higher than expected net interest income and lower than anticipated PCLs.
Net interest income came in at $2,261 million, above our $2,173 million estimate. Impaired PCLs were $567 million, below our $613
million expectation, and there was a $1 million release in performing PCLs, versus our estimated $9 million build. International
Banking loans declined ~3% YoY (versus ~2% YoY growth last quarter) and NIMs expanded 11 bps QoQ to 4.47%. We had modeled
the segment to be weaker mostly because we expected Latam Global Banking and Markets contribution to decline — and this did
in fact happen (down to $290 million from $372 million last quarter).
Canadian Banking earnings of $1,008 million (down ~8% QoQ and ~5% YoY) were lower than our estimate of $1,030 million.
Lower than expected earnings were mainly because non-interest revenue of $702 million was below our $741 million estimate
and total PCLs of $428 million were above our $405 million forecast. Canada P&C loan growth decelerated slightly to a decrease
of 1.0% YoY versus a decline of 0.9% YoY last quarter. NIMs remained stable QoQ at 2.56%.
In the Corporate segment, there were losses of $421 million (up ~11% QoQ), a larger loss than our estimated $320 million and
this segment has been challenging to model with taxes in particular rather different than previous quarters.
The reported CET 1 ratio was 13.2% (up 30 bps QoQ), slightly higher than our forecast of 13.1%. Q2/24's CET 1 ratio benefited from
lower risk-weighted assets (RWA), mainly due to RWA optimization activities (book size) partly offset by changes in operational
risk and market risk RWA, as well as the elimination of the capital floor add-on because of changes in book quality and model
updates according to BNS. RWA decreased 0.2% QoQ and YoY to $450.2 billion, below our estimate of $451.8 billion.
RBC Capital Markets appreciates your consideration in the 2024 Institutional Investor All-America and All-Canada Research Team survey.
All values in CAD unless otherwise noted. Priced as of prior trading day's market close, EST (unless otherwise noted).
Disseminated: May 28, 2024 07:25EDT; Produced: May 28, 2024 07:25EDT
For Required Non-U.S. Analyst and Conflicts Disclosures, see page 3

 

 

The Bank of Nova Scotia
There were limited signs of credit quality deterioration in Canada. Retail loans 90+ days past due for mortgages have increased
since Q1/22 to 19 bps this quarter (down 1 bp QoQ), compared to 17 bps in Q1/21 and the trough of 9 bps in Q4/22. 90+ days past
due credit card loans remained flat QoQ but increased 8 bps YoY to 79 bps. Secured and unsecured credit 90+ day delinquencies
moved to 31 bps (2 bps QoQ decline), up from 25 bps last year. PCLs in retail (auto, unsecured) were modestly higher.
Overall, we have a mildly positive view as Q2/24 results were slightly ahead of consensus expectations, credit quality was stable,
and the bank had positive operating leverage with a slightly higher than expected capital ratio. Although the dividend was
not increased, we suspect BNS will first turn off its discounted DRIP next quarter and resume dividend increases thereafter,
commensurate with EPS gro