Scotiabank profit drops 34% as loan-loss provisions near $2.2-billion - The Globe and Mail

People walk past a Scotiabank branch in Toronto on April 9, 2015.

Nathan Denette/The Canadian Press

Bank of Nova Scotia’s third-quarter profit fell 34 per cent as it set aside nearly $2.2-billion to cover potential loan losses, wiping out earnings from its international banking division and overshadowing strong results from capital markets.

Canada’s third-largest bank earned $1.3-billion, or $1.04 a share, in the three months that ended July 31, compared with $1.98-billion, or $1.50, a year ago.

On average, analysts had expected Scotiabank to earn $1.12 a share, according to data from Refinitiv.

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The bank held its quarterly dividend steady at 90 cents a share, in keeping with guidance from Canada’s banking regulator.

Provisions for credit losses – the funds banks set aside to cover loans that could go sour – surged by 206 per cent from a year ago, as Scotiabank absorbed the impact of the more recent spread of novel coronavirus in Latin American countries where it has a significant presence. The $2.18-billion in new provisions eclipsed the $1.85-billion the bank had already earmarked in the previous quarter, after the onset of the pandemic, but the bank views the third-quarter level as “the peak,” said chief risk officer Daniel Moore.

“We are at the high-water mark. We’re seeing the tide go out from here,” he told analysts on a conference call.

More than four-fifths of the increase in provisions was to cover loans that are still being paid back but could suffer future losses, based on economic models. And much of that increase was in Scotiabank's international arm, which is concentrated in Mexico, Peru, Chile and Colombia. As a result, profit from abroad that would have been nearly $1.2-billion before provisions and taxes was slashed to just $26-million, down 96 per cent from a year ago.

After a later onset of COVID-19 in Latin America created a lagging impact on the bank's international results, there are signs that some of those countries are "on a recovering path," said Ignacio Deschamps, head of international banking and digital transformation. Yet that recovery is likely to take some time. "For sure, 2021 is going to be a transitional year," he said.

“We are most concerned about the medium-term prospects for the bank’s international business, which we believe could see materially suppressed earnings power in a low-rate environment,” said Mike Rizvanovic, an analyst at Credit Suisse, in a note to clients.

In Canada, Scotiabank still has 236,000 loans worth $41.5-billion – mostly mortgages, but also credit-card debt and personal loans – that are deferring payments, and a further 2,330 loans totalling $18.1-billion in deferrals across its international markets. About 90 per cent of those deferrals are expected to expire by Oct. 31, but Mr. Moore said the bank has seen encouraging signs as 92 per cent of borrowers whose deferrals have already expired are once again on time with their payments.

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Profit from Canadian retail banking, which is Scotiabank’s largest division, fell 53 per cent to $429-million, largely because of higher provisions for loan losses. But lending margins also tightened by 18 basis points, presenting a longer-term challenge to the bank’s key source of profits (100 basis points equal one percentage point).

A buoyant quarter from the capital markets division delivered its best-ever quarterly profit of $600-million, up 60 per cent year-over-year thanks to strong revenue from trading and investment banking, helping to offset some of the pressure on other parts of the bank. And the bank’s wealth management arm, rebuilt through acquisitions in recent years, improved profits by 6 per cent to $321-million amid rebounding markets.

Scotiabank’s capital levels also bounced back, with its common equity Tier 1 (CET1) ratio rising to 11.3 per cent, after falling to the lowest level of any major Canadian bank at 10.9 per cent last quarter.

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2020-08-25 14:36:00Z
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