Pedestrians pass in front of a Bank of Nova Scotia branch in Toronto, Ontario, Canada, on Monday, Feb. 12, 2018.

Scotiabank earmarks US$1.33 billion for bad loans in pandemic

Pedestrians pass in front of a Bank of Nova Scotia branch in Toronto, Ontario, Canada, on Monday, Feb. 12, 2018.

Bank of Nova Scotia’s quarterly earnings plunged 41 per cent after the lender set aside a record amount for loan losses, giving investors their first indication of how the coronavirus pandemic will affect fiscal second-quarter results at Canadian banks.

(Photo: Bloomberg)

Scotiabank earmarked C$1.85 billion (US$1.33 billion) for soured loans, less than analysts predicted. Canada’s six biggest banks are expected to set aside C$8.9 billion for loan losses in the three months through April 30, triple the first-quarter total. At Scotiabank, earnings beat analysts’ estimates even with the increase in provisions and charges tied to its shuttered metals-trading business.

“Credit was largely better than expected,” Barclays Plc analyst John Aiken said in a note to clients Tuesday. Still, “the market was obviously expecting more reserves to be taken” and it’s likely “additional reserves will need to be taken in future quarters as the true impact of the pandemic will be felt.”

“The banking sector will be picking up broken eggshells for a number of quarters here.”

Scotiabank CEO Brian Porter

The lender’s shares rose 4.3 per cent to C$54.21 at 9:51 a.m. in Toronto. They’ve fallen 26 per cent this year, compared with a 22 per cent decline for Canada’s eight-company S&P/TSX Commercial Banks Index.

Scotiabank is the first large Canadian lender to report second-quarter results. The country’s six biggest banks are expected to post a 44 per cent profit decline in the quarter, the median of estimates compiled by Bloomberg Intelligence. That would be the biggest drop since 2009.

Chief Executive Officer Brian Porter told analysts Tuesday that he expects economic declines in the bank’s core markets for the balance of the year, followed by a return to growth in 2021 on a “gradual abatement of the pandemic” and reopening of economies. Loan losses will remain elevated for the rest of the year, with the third quarter resembling the second, though he expects all main businesses to remain profitable, he said.

(Photo: Winnipeg Free Press)

‘Broken Eggshells’

“Parts of the economy will snap back pretty quickly — the pent-up demand, the impact of the relief programs the government has provided will have its intended impact, but we’ve never been through this before,” Porter said. “This is not a one-quarter or two-quarter event. The banking sector will be picking up broken eggshells for a number of quarters here.”

Despite the surge in provisions, loans aren’t showing signs of deteriorating. Net impaired loans accounted for 0.53 per cent of overall customer loans, down from 0.61 per cent a year earlier, and net write-offs as a percentage of average loans totaled 0.47 per centless than 0.5 per cent a year ago.

Scotiabank’s international banking business had the steepest profit decline in the quarter, falling 74 per cent on higher provisions and lower contributions after selling some of its overseas operations as it sharpened its focus in Latin America and the Caribbean. Earnings from Canadian banking plunged 42 per cent as provisions rose, while the bank’s global wealth management and capital markets divisions posted higher income.

Scotiabank CEO Brian Porter

Trading Jumps

The Toronto-based company had a 56 per cent jump in trading revenue in the quarter, fuelled by fixed-income, echoing the trend seen by Wall Street trading desks last month when they reported their best three-month period in eight years thanks to surging client activity during the most volatile period on record. That, along with higher investment-banking fees, helped boost earnings in Scotiabank’s capital-markets division by 25 per cent to C$523 million.

Scotiabank also said it set aside C$232 million this year for US regulatory probes into the bank’s metals-trading practices and costs tied to the wind-down of that business.

Net income for the three months ended April 30 fell to C$1.32 billion, or C$1 a share, from C$2.26 billion, or C$1.73, a year earlier. Adjusted earnings totaled C$1.04 a share, beating the 96-cent average estimate of 13 analysts in a Bloomberg survey.