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Scotiabank earnings
Rafael Henrique/SOPA Images/LightRocket via Getty Images

Scotiabank misses expectations, but says borrower quality remains strong

Scotiabank’s third-quarter earnings fell short of expectations, but did manage to eke out 2% annualized net income growth in the third quarter.

However, Canadian banking profits were up 12% in the quarter to $1.2 billion, with residential mortgage volumes up 14% year-over-year.

Despite a “less certain economic outlook,” according to President and CEO Brian Porter, the bank’s Chief Risk Officer, Phil Thomas, said, “our customers continue to exhibit strong financial health.”

“Despite the current macroeconomic headline concerns, we remain confident in the quality of our re-positioned portfolio and prudent credit practices,” Thomas added.

The bank also increased its provisions for credit losses to $412 million in the quarter, nearly double compared to a year ago.

“The increase from last quarter was primarily driven by higher performing PCLs (provisions for credit losses), up $210 million, due to loan growth and a less favourable macroeconomic outlook,” said Thomas.

The following are highlights from Scotiabank’s third-quarter earnings, with pertinent sections highlighted in blue.

Scotiabank earnings highlights

Q3 net income: $2.59 billion (+2% Y/Y)
Earnings per share: $2.09

  • The total portfolio of residential retail mortgages rose to $278 billion in Q3, up from $243 billion a year ago.
  • 28% of the bank’s residential mortgage portfolio is insured. Of the uninsured balances, the average loan-to-value of this portfolio is down to 46% from 49% in 2021.
  • Residential mortgage volume was up 14% year-over-year.
  • Of the bank’s total mortgage portfolio, 63% are fixed-rate products while 37% are variable.
  • Of the bank’s uninsured portfolio, 8% of mortgages will be maturing in the next 12 months.
  • Net interest margin rose to 2.29% from 2.23% in Q3 2021 due to “higher deposit spreads [and] Bank of Canada rate increases.”
  • Mortgage loans that were 90+ days past due fell to 0.09% from 0.10% in Q2 and 0.13% a year ago.
  • Scotia raised its provisions for credit losses to $412 million in the quarter. That’s up from $219 in Q2.
  • Scotiabank is forecasting an additional 100 bps of rate hikes by the Bank of Canada by year-end, bringing the overnight target rate to 3.50%.
  • The bank’s gross impaired loans ratio continued to improve, falling to 58 basis points, down from 73 bps a year ago and a peak of 84 bps in Q1 of 2021.

Source: Scotiabank Q3 Investor Presentation

Conference Call

  • “Our credit outlook remains favourable, a result of our high-quality, highly secured portfolio,” said President and CEO Brian Porter. “Delinquencies and write-offs have continued to trend positively, which in absolute terms are lower than our pre-pandemic experience.”
  • “While we continue to see some preference towards variable rate mortgages, we note that 97% of our variable rate mortgage customers are above prime and have FICO scores of approximately 800,” noted Chief Risk Officer Phil Thomas. “These customers also have solid balance sheets, with approximately 40% higher balances in their deposit accounts compared to fixed-rate customers.”
  • “The macroeconomic outlook has evolved since last quarter,” Thomas said. “Despite higher inflation, additional interest rate hikes and moderating GDP forecast, the credit quality of our portfolio remains strong.”
  • “…our current portfolio [compared] to pre-pandemic, we’re running somewhere in the lines of half of our delinquency rates, half of our net write-off rates, [and] a big move to secured lending away from unsecured lending,” Thomas added.

Q3 Conference Call

Featured image: Rafael Henrique/SOPA Images/LightRocket via Getty Images