The Bank of Nova Scotia will focus on areas of profitable and sustainable growth in a bid to improve returns to shareholders going forward, new chief executive Scott Thomson said Feb. 28 after the bank posted first-quarter results that missed expectations.

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“We have not delivered the level of total shareholder returns that our shareholders should expect of us,” Thomson said in his first conference call since taking the helm at the bank earlier this month.

The remarks came after the bank reported a drop in profit for the first quarter, as it was hit with higher expenses and set aside more funding for loans that might potentially go sour.

Scotiabank reported net income of $1.8 billion in the three months ending Jan. 31, down 35 per cent from the same time last year. On an adjusted basis, Scotiabank earned approximately $2.4 billion or $1.85 per share, falling short of Bloomberg analyst expectations of $2.02 per share. Adjusted earnings were down about 14 per cent from the approximate $2.8 billion reported this time last year.

The bank’s provisions for credit losses — the amount the bank sets aside in a riskier credit environment — grew to $638 million from $222 million the year before. Scotiabank also recorded higher non-interest expenses at roughly $4.5 billion (up from $4.2 billion a year ago) and total income tax expense of $1.1 billion (up from $864 million in the same period last year), $579 million of which stemmed from the Canada recovery dividend.

The federal government introduced the one-time, 15 per cent banking and life insurer tax based on the average of 2020 and 2021 taxable income exceeding $1 billion in its 2022 budget.

On the conference call, Thomson indicated that the bank would be shifting course to focus on areas of profitable and sustainable growth, echoing a sentiment he expressed earlier this year when he said he saw opportunity to refine Scotia’s international banking segment.

He highlighted that the bank would need to be more disciplined with capital allocation and focus on long-term deposit growth which he said should reduce funding costs and strengthen client relationships.

“The bank’s financial performance in the first quarter of 2023 reflects both the merits of a diversified platform, but also the continued relative pressure on our profitability given our funding profile,” Thomson said during the conference call. “Going forward, we must be consistent and deliberate in our long-term deposit strategies to continue our journey to reduce our reliance on wholesale funding.”

Scotia is more dependent than its peers on funding from sources outside its own deposit channel, in part due to its international banking strategy and because of its smaller market share.

Thomson attributed the bank’s expense growth to higher personnel costs and rising technology investments and said the bank would be more thoughtful about expense control for the rest of the year.

Scotiabank also plans on being more transparent and explicit about forward guidance and milestones, and expressed caution for earnings in the next quarter.

For the first quarter, Scotiabank’s core Canadian banking adjusted profit slipped 10 per cent to about $1.1 billion despite higher revenue as higher credit loss provisions and non-interest expenses weighed on results. The international banking segment’s adjusted earnings grew to $661 million from $552 million from the first quarter of 2022 with higher net interest income and strong non-interest revenues.

The global wealth management segment’s adjusted earnings dipped six per cent to $392 million from last year amid a challenging market.

John Aiken, senior analyst and head of research at Barclays Bank PLC, noted that Scotiabank’s credit was weaker and the bank has been struggling with funding costs, hitting its net interest margins.

“We do not believe that expectations were high for Scotia in the first quarter, but the miss will likely be viewed as a disappointment as margins declined in international (flat domestically),” Aiken said in his Feb. 28 note. “Finally, much of the pressure on Scotia’s earnings came from losses in its corporate segment, which was blamed on funding costs (which remains a relative disadvantage for Scotia) and lower gains.”

Shares of Scotiabank were trading down nearly five per cent at $68.08 in late morning trading in Toronto.

The shares are down nearly 26 per cent over the past year.

• Email: shughes@postmedia.com | Twitter: StephHughes95