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Scotiabank says stronger results in most divisions send profits up 14 per cent

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TORONTO - Scotiabank chief executive Brian Porter has his eyes on international growth as the bank considers ways to use the money in its coffers to increase its presence.

Porter told analysts on Tuesday, after the bank delivered second-quarter results that beat expectations, that Scotiabank has a history of acquisitions and that some are "periodically" being considered as reasonable fits for its business.

"We are focused on building scale in our highest priority markets — Mexico, Peru, Colombia and Chile — where we have seen meaningful volume growth across both our retail and commercial portfolios," he said.

But he stopped short of saying whether the bank was seriously chasing any assets in those countries.

Scotiabank has options at its fingertips, especially after announcing earlier this month that it plans to sell its 37 per cent stake in CI Financial Corp. (TSX:CIX), worth about $3.8 billion. The bank has said it believes it can more profitably deploy the capital elsewhere, though it hasn't set a timeline for that to happen.

"We don't know how this is going to unfold, whether it's done in one transaction or a series of transactions, and the timing of the disposition is uncertain to date," Porter said.

One analyst asked if the bank would consider increasing a small share buyback program it announced Tuesday, under which it will repurchase one per cent of outstanding common shares, but Porter said he has other priorities.

"We do have a pipeline of acquisitions that we're looking at periodically that are on strategy," he said.

"We want to have the ability to capitalize on those, so in terms of a larger buyback, I can't envision one right now."

Earlier this month, Scotiabank signed a deal to buy a 20 per cent stake in Canadian Tire's financial services business for $500 million in cash as part of a strategic partnership between the companies. The bank will also provide up to $2.25 billion in credit card receivable financing for Canadian Tire's financial services business.

In the second quarter, profits at Scotiabank rose 14 per cent as it benefited from improved domestic results, as well as global wealth and insurance. Scotiabank reported that it made $1.8 billion or $1.39 per share, compared with $1.58 billion or $1.22 a share in the same quarter of 2013.

Total revenue rose to $5.7 billion from $5.3 billion in the same quarter last year while return on equity was 16.3 per cent, down from 16.5 per cent.

Adjusted earnings of $1.40 per share beat analysts' estimates by nine cents, according to figures from Thomson Reuters.

Scotiabank was the third big Canadian bank to surge past expectations for the quarter on the back of improvement in its core operations. Royal Bank (TSX:RY) and TD Bank (TSX:TD) also posted healthy profits and beat expectations last week with the help of stronger wealth management results.

"Overall, I'm pleased with the first half of the year and I expect our growth to continue to accelerate throughout 2014," said Porter.

Scotiabank shares (TSX:BNS) lifted to all-time highs of $69.07 early in the trading session, before pulling back to close at $68.77, a gain of 77 cents for the day on the Toronto Stock Exchange.

In the Canadian banking division, net income grew to $565 million from $507 million, helped by double-digit growth in both credit card and automotive lending volumes.

The provision for credit losses was $375 million, up $32 million from the same period last year. The bank said the year-over-year increase was primarily due to higher provisions in its international segment.

Those provisions affected the overall profits of the international banking which slipped to $416 million from $415 million.

Global and wealth insurance operations earned $345 million, up from $310 million from favourable market conditions.

CIBC World Markets analyst Rob Sedran highlighted securities gains of $219 million as being notably higher than his $120-million estimate.

"Overall, we are disinclined to get too fussed about earnings quality when a bank exceeds estimates by as much as this one did," he wrote in a note to clients.

"However, we are similarly disinclined to chase securities gains higher in our model, which colours our view on any revisions to street estimates."

Barclays analyst John Aiken called it an impressive quarter for Scotiabank, well ahead of expectations, but he said the uptick in provision for credit losses may be an issue for some investors.

"Scotia continued the pattern of better than anticipated results for the Canadian banks, however, its approach was decidedly different than what investors saw with Royal and TD last week," Aiken said.

"Scotia's bottom line did not benefit from better than anticipated credit quality. In fact, it saw some modest deterioration in domestic credit quality and incurred higher provisions in the Caribbean, driving up the total for International, despite moderation in Latin America."

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