* Q3 EPS C$0.87 vs C$0.98 year-earlier
* Loan loss provisions rise to C$554 mln from C$159 mln
* Shares decline 3.1 percent (Adds share reaction, analyst comment)
By Andrea Hopkins
TORONTO, Aug 28 (Reuters) - Bank of Nova Scotia (BNS.TO) said quarterly profit fell as the amount of money it set aside to cover bad loans jumped, and its shares dropped even as the results topped expectations.
The 3 percent decline in Scotia shares came after a week of gains for the sector, fueled by four days of mostly stronger-than-expected earnings from Canada’s big banks.
Scotiabank, Canada’s third-largest bank with operations in Latin America and the Caribbean, generated record revenue for the second consecutive quarter. Higher net interest income and strong trading fueled the gain, while increases in provisions for bad loans held back the results.
“Not surprisingly, the greatest deterioration in Scotia’s loan portfolio came from its international commercial lending, although all the other segments did experience additional weakness. That said, the deterioration was not as great as we had originally feared,” Aiken noted.
Overall, results posted by Canada’s banks cemented the sector’s reputation for prudent, steady management, even during a time of economic sluggishness.
Banking shares surged early in the week when Bank of Montreal (BMO.TO) kicked off earnings season with stronger-than-expected profits, and several smashed 52-week highs on Thursday after Royal Bank of Canada (RY.TO) and Toronto Dominion Bank (TD.TO) also beat forecasts.
But on Friday, the broad financial subindex slipped 1.1 percent.
“It would be fair to say that the banks stocks have had a tremendous run here. A lot of them have doubled from their bottoms, which was only 5-1/2 months ago. So you may have a little bit of profit-taking going on here,” said Bob Gorman, chief portfolio strategist at TD Waterhouse.
Scotiabank’s net income fell to C$931 million ($862 million), or 87 Canadian cents a share, in its fiscal third quarter, ended July 31.
That was down from C$1.01 billion, or 98 Canadian cents a share, a year earlier but topped analysts’ expectations of 84 Canadian cents a share, according to Reuters Estimates.
“Scotia ended the Big 6 earnings season with another blow-out quarter in a string where each bank exceeded expectations, with the notable exception of CIBC,” Dundee Securities analyst John Aiken said in a research note.
Provisions for credit losses rose to C$554 million from C$159 million. Banks have been setting aside more money to cover bad loans as consumers and businesses struggle to repay their debts in the recession.
Scotiabank Chief Executive Rick Waugh said economic conditions were improving in the second half of 2009.
“Record quarters from Canadian banking and Scotia Capital and a solid contribution from international banking have allowed Scotiabank to continue to deliver strong core earnings through challenging conditions,” Waugh said in a statement.
Domestic banking reported a record quarter, while net interest income was boosted by higher loan volumes and improved lending spreads.
Echoing the banks that went before it, Scotiabank said trading revenue more than doubled in the quarter to C$514 million -- a level Scotia executives told analysts was clearly not sustainable.
The dividend, as with all of Canada’s big five lenders, was unchanged.
“Strong trading and a lower-than-expected increase in loan losses drove higher-than-expected profitability. Capital ratios were also above our expectations,” RBC Dominion Securities analyst Andre-Philippe Hardy said.
Tier I capital was 10.4 percent, up from 9.8 percent a year earlier. With their strong capital and balance sheets, Canadian banks have been seen as possible buyers as the industry consolidates and weaker banks retrench.
Scotiabank was the last of Canada’s six largest banks to report third-quarter earnings. Royal Bank of Canada (RY.TO), Toronto Dominion Bank (TD.TO), Bank of Montreal (BMO.TO) and National Bank of Canada (NA.TO) all exceeded expectations, while Canadian Imperial Bank of Commerce (CM.TO) recorded a lower-than-expected profit.
Scotiabank shares fell C$1.51 to C$46.60 in late morning trade. ($1=$1.08 Canadian) (Additional reporting by Ka Yan Ng; Editing by Frank McGurty)