Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
Bank of Nova Scotia BNS reported slightly disappointing second-quarter results, mostly driven by a provisioning increase for the Canadian segment. Adjusted EPS was C$ 1.52, down 4% from a year ago. Note that the trajectory of the Canadian economy has heightened uncertainty due to tariffs.
Why it matters: Net income for Bank of Nova Scotia’s Canadian segment decreased 31% year over year, driven by an 88% increase in provisioning expenses. Global wealth management segment earnings were up 17% year over year, helping overall bank results.
· Total bank provisioning went up 20% sequentially to C$ 1.4 billion, largely driven by a C$ 248 million sequential increase in performing provisioning related to tariffs.
· The bank raised its credit provisioning guidance for 2025, expecting impaired provisioning for loans to remain at or slightly above its second-quarter level of 57 basis points of total loans.
The bottom line: We’ve updated our fair value estimates for narrow-moat-rated Scotiabank to C$ 75/USD 55 from C$ 76/USD 53 after incorporating these results and view the shares as fairly valued.
· The decrease in our Canadian dollar fair value estimate was driven mostly by a 15% increase in 2025 provisioning versus our prior forecast, partially offset by a 4% increase in 2025 net interest income as the bank is delivering better net interest margin expansion from lower funding costs. Our USD fair value estimate, meanwhile, increased due to Canadian dollar currency appreciation against the USD.
· Valuation for the Canadian banking sector has largely recovered from its April lows after some de-escalation in tariff rates. However, we still think the Canadian economy has elevated uncertainty, and we maintain our Medium Uncertainty Rating.
Coming up: Management expects 2025 to be a transitional year for its international banking segment, as the bank optimizes its business mix and exits some lower-profitability monoline clients. We expect Scotiabank to see more growth in this segment in 2026.
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