Scotiabank's international operations show signs of improvement as earnings top expectations

Bank boosts bad loan provisions to $1 billion as mortgage strains increase

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Bank of Nova Scotia took higher-than-expected provisions for credit losses in the second quarter, but revenue gains helped Canada’s fourth-largest bank beat analyst expectations.

Revenue rose 5.5 per cent from the corresponding period a year earlier, reaching nearly $8.4 billion, while provisions for credit losses were around $1 billion compared to $709 million a year earlier. The PCL ratio was 54 basis points, up four basis points from the previous quarter and 17 basis points from a year ago.

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Adjusted net income for the quarter ended April 30 was $2.1 billion, with earnings per share of $1.58, slightly above the consensus analyst estimate of $1.56, and down slightly from $2.16 billion a year ago.

International banking

International banking was a particularly bright spot in the second quarter. Less than six months after Scotia unveiled a strategy to focus on efficiencies rather than capital deployment in markets outside North America, the bank posted higher revenue, lower expenses and lower provisions for credit losses in the segment.

Net interest margin, which reflects what the bank takes in from credit products like loans and mortgages against what it must pay out on deposits and other savings products, was up 11 basis points from the previous quarter. Adjusted earnings in the division were $701 million.

Executives said the bank is also delivering on a strategy of increasing “share of wallet,” with new customers increasingly taking products and services beyond the initial mortgage or credit card.

“We are executing on our commitment to balanced growth as our deposit momentum continues, while maintaining strong capital and liquidity metrics,” said Scott Thomson, who was pulled from the boardroom 18 months ago to become Scotia’s CEO, a rare move for a large Canadian bank.

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“I am proud to see Scotiabankers across our global footprint rallying behind our new strategy and coming together to drive our key strategic initiatives forward,” he said.

Bank of Nova Scotia’s CET1 ratio, a closely watched measure of a bank’s capital cushion, ended the second quarter at 13.2 per cent, up from 12.3 per cent last year.

Mortgage strain showing

On a conference call with analysts Tuesday morning, Scotia executives said some Canadian mortgage holders, especially those with variable rate mortgages, are beginning to struggle with debt given steep hikes in interest rates since spring 2022, while others are preparing for increased monthly payments on renewal by keeping more money in savings accounts.

Higher provisions for impaired loans in the Canadian banking retail portfolio in the second quarter were primarily tied to auto loans and unsecured lines of credit.

“The friction is really coming from Toronto, the GTA and Vancouver, where you have higher costs on the mortgage,” said Phil Thomas, chief risk officer at the bank.

“I think people are just in the process now of, given the higher prolonged rates, making trade-offs and maybe they got a little bit over the skis on (mortgage) origination. But these are good customers that are just facing a little bit of tightness in terms of their cash flow.”

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He said Scotia has been focusing on collection efforts and proactive outreach to customers who appear to be struggling and falling behind on loan or credit payments.

“It’s not like we have a bad customer here,” he said. “This is a customer who’s sort of going through a life event or having just some difficulties making some payments.”

Thomas said an interest rate cut, which could come as early as June or July, will help mortgage holders, particularly those with variable rate mortgages in expensive cities such as Toronto and Vancouver.

He estimated that a 25-basis-point interest rate cut would lead to an average payment reduction of around $100. However, he warned that it will take one to three quarters after a cut for the bank to see the full benefit, depending on customers’ circumstances, including other debt.

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Scotia’s Canadian banking division posted adjusted earnings of $1 billion in the second quarter. Revenue growth outpaced expense growth, but provisions for credit losses increased compared from a year earlier. Deposit growth, meanwhile, was up seven per cent year-over-year.

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