Scotiabank's international strength buffers it from provisions that hit rival BMO

By Nichola Saminather

(Reuters) - Canadian lender Bank of Nova Scotia <BNS.TO> beat estimates for quarterly profit on Tuesday, as strength in its international division buffered the bank from higher credit provisions, a factor that led rival Bank of Montreal <BMO.TO> to disappoint.

Scotiabank's shares rose 1.7% to C$68.90 in morning trading in Toronto, while BMO dropped 3.3% to C$89.33, its lowest since Jan. 7.

Banks in Canada are seeing increased credit provisions on elevated household debt-to-income ratios and struggles in the oil and gas sector, while margins and capital markets businesses face pressure from a global economic slowdown and trade uncertainties.

BMO reported a 64.5% jump in loan-loss provisions of during the quarter from a year ago. Scotiabank posted a 35% rise excluding one-off provisions taken a year earlier, although the level was below analyst expectations.

Although Scotiabank posted slower loan growth than BMO -- 6.3% vs 12.4% -- its international business, the biggest among major Canadian banks, drove its performance. That overseas presence for Scotiabank is focused on the Latin American trading bloc comprising Mexico, Peru, Chile and Colombia.

A 14% jump in adjusted earnings in Scotia's international business to C$815 million ($613.94 million), compared with 2.9% growth in domestic operations to C$1.17 billion, helped lift the results of Canada's third-biggest lender, and offset a 15% decline in profit from its global banking and markets unit.

The gains were driven largely by a 28% surge in profit in the Chile business, thanks to the acquisition of BBVA Chile, which helped shield Scotia from a 20% decline in earnings in Mexico due to lower margins.

Acquisitions made last year, including BBVA Chile, Citibank's Colombian retail operation overseas, a controlling interest in Cencosud Peru, Jarislosky Fraser and MD Financial, will contribute about C$400 million to earnings in 2020, executives said on an analyst call. This is higher than the 15 cents a share the bank had forecast earlier, they said.

"After four consecutive misses on earnings, we are encouraged" by Scotiabank's results, analysts at Canaccord Genuity wrote in a note.

While BMO was the first major Canadian bank to post third-quarter earnings growth in its capital markets business, with profit rising 5% from a year ago, that was eroded by lower earnings from its wealth management unit and a mere 1% increase in its Canadian and U.S. retail business income.

"The bank’s revenue and non-interest expenses were slightly better than we had expected, although that was more than offset by higher loan loss provisions," analysts at Credit Suisse wrote in a note.

"The wealth segment was a drag due to weaker insurance earnings... while more concerning was a C$0.05/share miss on U.S. (personal and commercial) banking as margins were materially lower than last quarter."

BMO's Canadian consumer loan losses are expected to normalize over the next few quarters, and expense growth in the second half of the year will be half the rate of the first six months, executives said on a conference call.

BMO earned C$2.38 a share excluding items, compared to analyst expectations for C$2.49 per share, according to IBES data from Refinitiv.

Scotiabank's adjusted earnings, excluding items like a one-time loss related to the sale of its operations in Puerto Rico and the U.S. Virgin Islands, was C$1.88 per share, compared with analysts' estimates of C$1.85.

Last week, Royal Bank of Canada <RY.TO>, the nation’s biggest bank by market value, and Canadian Imperial Bank of Commerce <CM.TO>, the most domestically focused lender, posted profit increases. This was driven by their wealth management divisions, particularly in the U.S., and lending at home, which offset slowdowns in their capital markets businesses.

Both banks also warned of the potential impact on margins of a slowdown in global economic growth and the resulting monetary policy easing by central banks.

(Reporting by Nichola Saminather in Toronto and Bharath Manjesh and C Nivedita in Bengaluru; Editing by Shinjini Ganguli and Bernadette Baum)