March 4, 2008 / 2:28 PM / in 10 years

UPDATE 4-Scotiabank profit drops 18 pct, shares fall

(Adds comments, closing share prices)

By Leah Schnurr and Nicole Mordant

TORONTO, March 4 (Reuters) - Bank of Nova Scotia (BNS.TO)’s shares fell on Tuesday after it reported an 18 percent drop in first-quarter earnings, just shy of market expectations, amid credit market-related charges and higher loan-loss provisions.

Still, Scotiabank, Canada’s third-biggest bank, maintained its earnings targets for the year, analysts said, unlike Bank of Montreal (BMO.TO), which also reported results on Tuesday and warned it would not meet its profit objectives.

“When you sit back and consider all of the domestic banks and their exposure to U.S. credit, Scotia’s got the very best profile and they just reconfirmed that...today,” Blackmont Capital analyst Brad Smith said.

Shares of Scotiabank fell 91 Canadian cents, or 2 percent, on the Toronto Stock Exchange to C$45.59 along with other banking stocks, amid disappointment the bank wasn’t as immune to credit market troubles as some had hoped.

“I think what people are coming to realize now is that if you get an economic slowdown worldwide, it doesn’t matter which bank you’re in, it’s just a question of whether it gets hurt more or less,” said Andrew Martyn, portfolio manager at Davis-Rea.

Scotiabank earned C$835 million ($843 million), or 82 Canadian cents a share, in the three months ended Jan. 31. That compares with net income of C$1.02 billion, or C$1.01 a share, in the same period a year earlier.

If several credit market-related writedowns -- worth about 17 Canadian cents a share -- are added back to earnings, the figures are just below analysts’ average estimate of C$1.01 a share, according to Reuters Estimates.

The writedowns, worth C$238 million before tax, are for the bank’s exposure to a number of trouble spots, including structured investment vehicles, asset-backed commercial paper and monoline bond insurers.

“Importantly, the remaining exposure of Scotia to these areas appears limited relative to its peers,” Merrill Lynch analyst Sumit Malhotra said in a note to clients.

Scotiabank President and Chief Executive Rick Waugh said the bank would maintain its 2008 target of 7-12 percent growth in diluted earnings per share, although he acknowledged it would be a challenge to meet.

Looking ahead, Waugh noted some light at the end of the tunnel, especially a pickup in capital markets activity.

“Capital markets are expected to improve in the second half of the year, short-term rate declines are leading to improve funding costs for us, (and) the Canadian dollar is expected to hold in its current range,” Waugh said on a conference call.

Executives sought to reassure investors on the bank’s exposure to troubled segments of the credit market. They said the bank’s exposure to U.S. monoline bond insurers was primarily contained to one counterparty, which did not include exposure to the problematic U.S. subprime mortgage market.

The bank also has C$144 million in holdings of Canadian nonbank asset-backed commercial paper, a market that seized up last August and is in the throes of a restructuring attempt.

Waugh said he expects turmoil in global financial markets will provide acquisition opportunities, although the bank will stick to its strategy of smaller deals in familiar markets.

“With the challenges in the markets, it is more and more turning into a buyer’s market,” Waugh told reporters after the bank’s annual meeting. “So there should be some good opportunities.”

The bank aims to keep diversifying in regions such as South America and the Caribbean, he said. There are no plans for a major acquisition.

Meanwhile, Scotiabank’s provisions for credit losses, which are rising across Canada’s bank sector after years of record lows, rose 23 percent to C$91 million in the first quarter.

Breaking results down by division, the bank said net income at its domestic banking unit rose 1.7 percent to C$367 million.

Profit at Scotiabank’s international operations, which include businesses in the Caribbean, South America and Mexico, fell 10.7 percent to C$282 million, mainly because of a lower contribution from its Mexican unit, where loan loss provisions and taxes rose. The international division accounts for about a third of Scotiabank’s total net income.

Profit at Scotia Capital, the group’s investment banking and capital markets unit, slumped 36 percent to C$187 million from a year earlier as trading revenue fell.

$1=$0.99 Canadian Additional reporting by Jeffrey Jones and Frank Pingue; Editing by Peter Galloway

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