December 2, 2008 / 5:06 PM / 10 years ago

UPDATE 3-Scotiabank's 2009 outlook is below expectations

*Scotiabank Q4 profit down 67 pct to C$315 mln

*Bank sees ‘moderate overall growth’ in 2009

*Sets 2009 target of 7-12 percent EPS growth

*Stock drops 7.1 pct to close at C$32.38 (Adds comments from CEO, analysts; updates stock price and adds byline)

By Lynne Olver

TORONTO, Dec 2 (Reuters) - Bank of Nova Scotia (BNS.TO) said on Tuesday that quarterly profit fell 67 percent, which was not a surprise since the bank gave the market early warning about writedowns in its Scotia Capital unit.

But the bank’s outlook for “moderate” growth in 2009 was below some analysts’ expectations, and helped send its stock down more than 7 percent on the Toronto Stock Exchange on Tuesday.

Scotiabank said it is targeting 7 percent to 12 percent growth in 2009 earnings per share, implying a 2009 EPS range of C$3.26 to C$3.42 a share, after the bank earned C$3.05 a share in 2008.

RBC Capital Markets analyst Andre-Philippe Hardy said he had been looking for profit of C$3.45 next year, and Merrill Lynch analyst Sumit Malhotra said in a note that he was unsure how literally to interpret the below-consensus guidance.

“The world causes us to be cautious,” Scotiabank President and Chief Executive Rick Waugh told a conference call when asked about the bank’s earnings outlook.

Loan loss provisions are expected to rise and foreign exchange rates are volatile, but the bank still wanted to provide an earnings growth target that was prudent and achievable, Waugh said.

“Hopefully we’ll overachieve,” he added.

Scotia, Canada’s third largest bank, also aims to have return on equity of 16 percent to 20 percent next year, reflecting “the realities of the current environment,” Waugh said.

That is down from its target of 20-23 percent for 2008. Actual return on equity, a key measure of profitability, was 16.7 percent in 2008.

“I would be inclined to say we’ll wait and see,” David Cockfield, senior vice president at Leon Frazer & Associates, said about the bank’s outlook. The economy could deteriorate more rapidly than business executives expect, he added.

For the final quarter of its fiscal 2008, Scotiabank’s net income fell to C$315 million ($254 million), or 28 Canadian cents a share, in the three months ended Oct. 31. That was down from C$954 million, or 95 Canadian cents, in the year-earlier period.

A slew of securities charges cut earnings by 65 Canadian cents a share, slightly more than the bank had warned the market about on Nov. 18.

Analysts had expected profit of 95 Canadian cents a share before items, and 34 Canadian cents on a net basis, according to Reuters Estimates.

The bank disclosed last month that it would take writedowns of about C$595 million after tax, while actual writedowns amounted to C$642 million. These were related to trading losses after the bankruptcy of Lehman Brothers Holdings LEHMQ.PK, and fair-value adjustments on a variety of securities and derivatives in volatile debt and stock markets.

Its provision for credit losses doubled in the fourth quarter to C$207 million, as provisions were raised in its international retail portfolios and in Canadian banking.

Scotiabank said it sees “significant uncertainty” for the financial sector in 2009, but anticipates “moderate overall growth” because of its diversified businesses.

Its priorities will be risk management and expense control next year, but the bank does not see any “forced layoffs,” Waugh said.

Cost controls have traditionally been a strength at Scotiabank, said Brenda Lum, a credit analyst at rating agency DBRS.

“They’ve always been very lean to start with,” Lum said. “They’ve been able to manage their expenses, particularly in times of declining revenue.”

Net income in Canadian banking, which includes wealth management and and commercial banking, rose 6 percent in the quarter to C$466 million. Adjusted for a one-time gain a year earlier, profit in the Canadian banking unit jumped 35 percent.

$1=$1.24 Canadian Additional reporting by Jennifer Kwan in Toronto; editing by Peter Galloway

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