Revenue gains drive Scotia's strong performance; interest rate cut could help mortgage holders
Bank of Nova Scotia increased provisions for credit losses more than expected in the second quarter, but revenue gains helped the bank surpass analyst expectations, according to the Financial Post.
Revenue rose 5.5 percent from the same period a year earlier, reaching nearly $8.4bn. Provisions for credit losses were around $1bn compared to $709m 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.
For the quarter ended April 30, adjusted net income was $2.1bn, with earnings per share of $1.58. This was slightly above the consensus analyst estimate of $1.56, though down from $2.16bn a year ago.
International banking showed significant improvement. Less than six months after the bank introduced a strategy to focus on efficiencies rather than capital deployment in markets outside North America, it reported higher revenue, lower expenses, and lower provisions for credit losses in this segment.
The net interest margin, indicating the difference between what the bank earns on credit products like loans and mortgages and what it pays on deposits and other savings products, rose by 11 basis points from the previous quarter. Adjusted earnings in this division were $701m.
Executives highlighted the bank's strategy of increasing “share of wallet,” with new customers adopting additional products and services beyond initial mortgages or credit cards.
“We are executing on our commitment to balanced growth as our deposit momentum continues, while maintaining strong capital and liquidity metrics,” said CEO Scott Thomson, who took the role 18 months ago.
“I am proud to see Scotiabankers across our global footprint rallying behind our new strategy and driving our key strategic initiatives forward,” he added.
The CET1 ratio, a key measure of the bank’s capital cushion, ended the second quarter at 13.2 percent, up from 12.3 percent last year.
In a conference call with analysts, Scotia executives noted that some Canadian mortgage holders, especially those with variable-rate mortgages, are starting to struggle with debt due to steep interest rate hikes since spring 2022.
Others are preparing for higher monthly payments upon renewal by saving more.
Higher provisions for impaired loans in the Canadian banking retail portfolio were mainly linked to auto loans and unsecured lines of credit.
Chief Risk Officer Phil Thomas stated, “The friction is really coming from Toronto, the GTA and Vancouver, where you have higher costs on the mortgage. People are making trade-offs due to prolonged high rates, and maybe they overextended themselves on mortgage origination. But these are good customers experiencing cash flow tightness.”
Thomas emphasized the bank's focus on collection efforts and proactive outreach to customers who seem to be struggling with loan or credit payments. “It’s not like we have a bad customer here. This is a customer facing a life event or having difficulties making some payments,” he said.
He suggested that an interest rate cut, which could occur as early as June or July, would benefit mortgage holders, especially those with variable-rate mortgages in high-cost cities like Toronto and Vancouver.
He estimated that a 25-basis-point interest rate cut would reduce average payments by around $100. However, he noted that the bank would see the full benefit of a rate cut one to three quarters later, depending on customers’ other debts.
In the second quarter, Scotia’s Canadian banking division reported adjusted earnings of $1bn. While revenue growth outpaced expense growth, provisions for credit losses rose compared to a year earlier. Deposit growth increased by seven percent year-over-year.
