Canada's Scotiabank misses estimates as capital markets income slumps

© Reuters. FILE PHOTO: A woman leaves a Bank of Nova Scotia (Scotiabank) branch in Ottawa, Ontario, Canada, May 31, 2016. REUTERS/Chris Wattie/File Photo

By Nichola Saminather and Manya Saini

TORONTO (Reuters) -Bank of Nova Scotia (Scotiabank) reported third-quarter profit a touch below estimates on Tuesday as a sharp drop in income from its capital markets unit overshadowed strong loan growth in its international business.

Canada's No. 3 lender kicked off quarterly earnings reporting for the country's biggest banks, with markets watching closely for signs of how they will be affected in future quarters by decades-high inflation and central banks' rapid rate increases.

Scotiabank's shares dropped 3.8% in morning trading in Toronto, the biggest intraday loss since June 2020, to C$77.72. The Toronto stock benchmark rose 0.3%.

"Overall, it was not a bad quarter, but we believe that the market's focus will be on the headline miss and investors will be looking ahead to the uncertain outlook," Barclays (LON:BARC) Analyst John Aiken wrote in a note.

The biggest drag on Scotiabank's earnings came from its capital markets unit, which reported a 26% drop in profit for the three months ended July 31, as advisory and trading revenues fell in challenging market conditions.

The bank expects spending growth in its capital markets business to outpace revenue expansion this fiscal year. However, earnings should bounce back by the fourth quarter, helped in part by deals in the pipeline, executives said on a call.

Scotiabank raised its provisions for credit losses (PCL) on expectations of longer-lasting inflationary pressure and more central bank rate hikes.

Still, "we're not seeing any big credit headwinds on the horizon," Chief Risk Officer Philip Thomas said on the call. "The health of the consumers continues to be very, very strong."

Adjusted pre-tax, pre-provision earnings fell 1% from a year earlier.

Scotiabank's international business reported a 30% jump in adjusted earnings, driven by strong loan growth. But the unit's net interest margin (NIM) slipped 1 basis point from the prior quarter, which executives attributed to higher funding costs as more customers moved to term deposits.

The Canadian business saw a 12% increase in earnings.

Scotiabank said net income excluding one-off items came to C$2.10 a share, up from C$2.01 a year earlier. Analysts had expected C$2.11 a share.

Scotiabank shares are now down 14.8% since the start of this year.

($1 = 1.3021 Canadian dollars)