The bank, analyst called 'canary in the coal mine,' shows growing stress of consumer lending
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Bank of Nova Scotia missed analysts’ estimates for loan-loss provisions amid growing stress in consumer lending as the Canadian economy weakens as well as higher delinquencies among retail borrowers in its Latin American businesses.
Provisions for credit losses rose to $962 million in the fiscal first quarter, the Toronto-based bank said in a statement Tuesday. That was more than the $922 million average estimate of analysts in a Bloomberg survey.
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More borrowers are confronting higher monthly payments as their mortgages come up for renewal, and that, in turn, is amping up the pressure on its credit-card holders and auto-loan borrowers. RBC Capital Markets analysts Darko Mihelic has called Scotiabank a “canary in the coal mine” to watch for stress on consumer credit.
Loan-loss provisions on performing loans for the quarter were “driven by retail-portfolio growth and the impact of the continued unfavourable macroeconomic outlook, mainly on the commercial, corporate and Canadian retail portfolios,” Scotiabank said in the statement, while provisions for impaired loans were driven by Canadian auto loans and unsecured lines and delinquencies in international banking retail portfolios, mostly in Colombia, Peru and Chile.
Scotiabank, which unveiled a new strategy under chief executive Scott Thomson in December, was the only large Canadian lender to shrink its domestic mortgage book last year, and it actively sought out more core deposits to lower its cost of funding. It was all an effort to strengthen net interest margins, the difference between what it earns on loans and the amount it pays in interest for deposits.
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“The bank delivered solid earnings this quarter driven by strong revenue growth, margin expansion and expense discipline,” Thomson said in the statement. “I am encouraged by the early progress against our strategic priorities, and the further strengthening of our balance sheet metrics.”
The lender’s net interest income totalled $4.77 billion in the three months through January, less than the $4.79 billion analysts had forecast.
Scotiabank also said it plans to focus new spending on North America and is evaluating whether to sell some of its businesses in Latin America that have delivered poor returns.
The bank has seen significant turnover in its leadership ranks, with the head of its capital-markets business, Jake Lawrence, set to exit next month for an executive role with Power Corp. of Canada. Thomson last year appointed new executives to run the bank’s international, wealth-management and Canadian retail-banking divisions.
Scotiabank earned $1.69 per share on an adjusted basis in the first quarter, compared with $1.84 a year earlier.
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The lender is the first large Canadian bank expected to be affected by the phase-in of new regulatory rules on capital floors. This will require banks that use internal methods of calculating their risk-weighted assets — a crucial metric for capital ratios — to shift to using a standardized approach for more assets over time.
As a result of these changes, banks’ Common Equity Tier 1 capital ratios are likely to be dragged lower. Scotiabank said that ratio now stands at 12.9 per cent, compared with 13 per cent at the end of the fourth quarter. Canada’s bank regulator requires large lenders to maintain CET 1 ratios of at least 11.5 per cent.
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2024-02-27 11:40:06Z
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