Scotiabank grows profits amid backdrop of economic challenges

TORONTO -- Scotiabank boosted its first-quarter profit as the last of the big banks to report their earnings showed resiliency against the backdrop of a gloomy economy.

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But CEO Brian Porter warned Tuesday that he anticipates challenging market conditions and depressed energy prices will persevere, at least for the first half of this year.

"We expect there to be additional provisions for some of our loans in the energy sector," Porter said during a conference call to discuss the bank's results.

"Notwithstanding these headwinds, we are encouraged by some of the recent trends we have seen in selected businesses. ... As we look forward to the balance of 2016, we expect concerns about the global economy to persist. Here in Canada, we expect the second half of the year to be stronger than the first half, and benefit from a strengthening export economy."

The bank (TSX:BNS) reported quarterly net income of $1.81 billion, up five per cent from the $1.73 billion it reported during the same period last year, as earnings from both its Canadian and international banking operations grew.

The earnings amounted to $1.43 per diluted share, up from $1.35 per share a year ago, while revenue grew to $6.37 billion from $5.86 billion.

Scotiabank also boosted its quarterly dividend by two cents to 72 cents per share, and Porter noted that the lender's balance sheet is strong enough to "selectively pursue acquisitions."

However, Edward Jones analyst Jim Shanahan said the bank's first-quarter results, which may seem positive at a glance, reflect some troubling trends.

"They're lending more in this environment and their loan growth was stronger than we expected," Shanahan said.

"That's a positive, but it concerns me when you observe a bank increasing lending activity and raising the dividend when it seems they should be hoarding capital."

Despite warnings that oilpatch woes would hit the lenders' loan books and the sluggish domestic economy would hamper earnings growth, four of Canada's six biggest banks managed to increase their first-quarter earnings and revenue.

Only Royal Bank (TSX:RY) and National Bank (TSX:NA) reported lower net income compared to the same quarter last year.

Combined, Canada's six largest lenders reported $8.80 billion in quarterly profits, up from $8.58 billion a year ago.

In revenue, the banks raked in a combined $34.29 billion, compared to $33.05 billion during the first quarter of 2015.

Like its peers, Scotiabank reported that it is setting aside more money for bad loans, boosting its provision for credit losses by 16 per cent, or $76 million, to $539 million.

Shanahan said the true impact of the oil price shock on the banks' loan books is not evident from the lenders' first-quarter results. That's because the banks have been working with challenged oilpatch companies and providing them with some relief on their debt obligations, he said.

"The oil and gas companies are going to generally report this as good news," said Shanahan.

"The banks are going to under-report it because it masks what is otherwise deteriorating loan quality."


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