Bank of Nova Scotia the Loser as Big Six Report Quarterly Results - Desjardins

The day after Bank Day in Canada, analysts had a chance to absorb the flurry of quarterly results coming from four of the Big Six. And if you ask Desjardins, the loser is Bank of Nova Scotia (BNS).

"Unlike most of the other Canadian banks, Scotia appears to be trying to smooth out the impact of the credit cycle on its earnings," Desjardins analyst Michael Goldberg said in a note Friday. "We fear that this will hurt, rather than help, relative performance."

He actually likes Scotiabank's underlying business and strategy, but is concerned with the quality of earnings due to a jump in new bad loans without an accompanying increase in loan provisions.

"We believe that investors are likely to view the relatively low provisions as an overstatement of earnings," Mr. Goldberg said.

Even so, Scotiabank's reported credit loss provisions at C$489-million are far above Desjardin's expected C$319-million and C$352-million industry consensus. However, net NPLs have outpaced these provisions by growing to C$829-million, three times what they were in the first quarter of 2009 (C$279-million).

Mr. Goldberg sees a "silver lining" to this situation because a greater proportion of Scotiabank's loans are hard asset-secure than ever before. Still, he's downgraded the bank to a hold from a top pick, and dropped target price to C$41.50 from $45.50.

If you haven't seen our quarterly results stories, including Royal Bank's (RY) latest, you can find them here:

Bank of Montreal
TD Bank
CIBC
National Bank
Bank of Nova Scotia
Royal Bank

Comments

[Teutonic Kn...:]

FP Trading Desk -

Interesting article and quite illuminating as well.

A while ago, I responded to another SA article asking about why that author would place BNS ahead of the other Big 5's so to speak.

Her view was that BNS has a more focused portfolio in the Caribbean and in South America, which she felt would be less prone to losses compared with exposure in the North American markets.

Now according to your reports, BNS obviously did not fare as well as had hoped.

Would you care to enlighten me as to why BNS appeared to have suffered more than its share of bad loans compared with the other Big 5's?

Thank you in advance.
Teutonic

May 30 02:30 PM

[Michael D.:]

Canadian Banks and their reporting standards are very conservative. From the above, the analysts think that BNS is under-reporting loan loss provision to smooth revenue.

On the other hand, RY booked charges to put themselves into a $50 million loss, but the underlying business is sound.

May 31 09:35 AM