A profitability milestone landed at a major Canadian bank before management expected it. Return on equity, the ratio measuring how much profit a bank generates for every dollar shareholders have committed, reached 14.2% at the Bank of Nova Scotia (NYSE: BNS) in quarterly results reported August 25. Management had been framing that level as a medium-term target.
Adjusted net income came in at $2.97 billion. Adjusted earnings per share rose to $2.28 from $1.88 a year earlier, a 21% increase. CEO Scott Thomson said publicly that 14% is not the ceiling for the bank's returns.
Where the gains came from
Canadian Banking earned $1.1 billion, up 12% year over year. The division posted its fifth straight quarter of margin expansion, and return on equity hit 19.4%, up 160 basis points from the prior quarter. Commercial loan growth accelerated to 3% from 2% the quarter before, and small business lending rose 10% year over year. The share of new credit card acquisitions in premium products climbed to 45% from 35% a year ago.
Global Banking and Markets posted $647 million in net income, its best quarter on record, up 37% year over year. The division completed what the bank describes as the two largest debt capital markets issuances in Canadian history and the country's biggest IPO since 2021. Loans in that segment grew 7% sequentially.
Global Wealth Management earned $515 million, up 23%, on $3 billion in net sales, a Q3 record. Assets under management reached $474 billion. Referrals between Canadian Banking and Wealth clients totaled $14 billion year to date, with commercial-to-wealth referrals up 33%.
International Banking contributed $725 million, up 6% on a constant dollar basis, with retail loans growing 5%. The quarter also marked the bank's tenth straight period of positive operating leverage, meaning revenue grew faster than costs. Expenses overall rose 14% year over year, with technology spending up 16% to $1.5 billion.
The loose threads
Chief Risk Officer Shannon McGinnis flagged elevated mortgage delinquencies in the retail book, even as the average credit score in that portfolio sits at 798. International Banking's provision for credit losses ran at 138 basis points against 42 in Canadian Banking. The bank absorbed an incremental $57 million provision on a corporate account in Brazil that management says is still being worked through.
Two items will weigh on the fourth quarter specifically. Capital ratios face a roughly 15 basis point hit as certain international portfolios shift to a different credit risk measurement approach. A planned cut to Chile's corporate tax rate will also force a one-time deferred tax asset write-down.
Hedge fund positions in Scotiabank grew from 19 to 24 in the most recent quarter. As of September 1, shares traded at 13.53 times forward earnings, a multiple consistent with steady execution rather than an accelerating growth story. The $57 million Brazil exposure and McGinnis's mortgage delinquency warning are the specific readings to watch as the bank moves into the fourth quarter.