With its new CEO now at the helm, Scotiabank has laid out its plans for a shift in focus in terms of how it funds its loan book.
During the bank’s first-quarter earnings call, Dan Rees, head of Canadian Banking, outlined Scotiabank’s plan to put a greater emphasis on growing deposits as the bank lowers its reliance on wholesale funding from larger investors, in part due to liquidity reasons.
“I [can] confirm the outlook…with regards to our intentionally slowing the mortgage portfolio, even in light of the fact that the market has been slow,” Rees said. “I think that trend will continue. Part of the reason for that is liquidity and risk-weighted assets…but also the emphasis on profitable growth through cross-selling and retail.”
Rees noted that the bank must be “consistent and deliberate” in its long-term deposit strategies to “continue our journey to reduce our reliance on wholesale funding.”
“Rapid loan growth, coupled with high-cost funding sources, has adversely impacted profitability,” he said. “And going forward, we will be cognizant of the need to pace loan growth, particularly in less profitable product segments. The negative operating leverage in the bank certainly warrants attention.”
Scotiabank’s new President and CEO, Scott Thompson, added that increasing deposits “not only reduces funding costs, but it deepens our relationships with our customers, allowing for a more detailed understanding of their needs, thereby enhancing the multi-product opportunity.”
A year ago, 18% of Scotiabank’s new mortgage customers had a “day-to-day” account with the bank. That’s now risen to 23%.
“Deepening [the relationship] with existing customers off the loan portfolios is going to continue to be a prominent story going forward,” Rees added.
Mortgage demand remains strong
Scotiabank also reaffirmed the strength of its mortgage portfolio, despite the higher costs faced by borrowers due to rising interest rates. The bank reported 7% year-over-year growth in mortgage volumes, although that’s well off last year’s 15% growth rate.
“Despite variable rate mortgage customers seeing higher payments with a cumulative 425-basis-point rate increase, given the structure of our variable rate product, deposits for this group remain above pre-pandemic levels,” said Phil Thomas, Chief Risk Officer. “Variable rate mortgages remained stable at 37% of our total mortgage portfolio.”
Scotiabank also provided insight into the maturity schedule for its mortgage portfolio, showing that the bulk of loans ($91.1 billion) will be up for renewal in 2026.
Scotiabank earnings highlights
Q1 net income (adjusted): $2.37 billion (-14% Y/Y)
Earnings per share: $1.85
- The total portfolio of residential retail mortgages rose to $302 billion in Q1, up from $289 billion a year ago.
- 27% of the bank’s residential mortgage portfolio is insured (down from 28% in Q4). Of the uninsured balances, the average loan-to-value of this portfolio is 52% (up from 49%).
- Residential mortgage volume was up 7% year-over-year.
- Net interest margin in Q1 in Canadian Banking was 2.26%, up 7 bps from a year ago, “due to higher deposit spreads, reflecting the 425 basis points of Bank of Canada rate increases,” said Raj Viswanathan, Chief Financial Officer.
- Mortgage loans that were 90+ days past due rose to 0.11%, up from 0.9% in the previous quarter but still below the 0.12% reported in Q1 2022.
- Scotia raised its provisions for credit losses to $638 million in the quarter, up from $222 million a year ago. Provisions are funds allotted to cover any loan losses that may arise.
Source: Scotiabank Q1 Investor Presentation
- “Overall, the performance of our loan portfolios remains strong, and we are seeing a continued normalization of credit trends as customers adjusted to higher inflation and borrowing costs,” said Phil Thomas, Chief Risk Officer.
- “Despite variable-rate mortgage customers seeing higher payments with a cumulative 425 basis point rate increase, given the structure of our variable rate product, deposits for this group remain above pre-pandemic levels,” Thomas added. “Variable rate mortgages remained stable at 37% of our total mortgage portfolio.”
- Thomas added that Canadian Banking head Dan Rees’s “vision of diversifying [Scotiabank]’s revenue mix beyond mortgages and autos is the right one and will pay dividends over time.”
- “Mortgage growth has slowed down. And that’s a market, it’s a market we all live in,” said Raj Viswanathan, Chief Financial Officer. “I think we know it quite well. Rate increases have been a big component of the slowdown in the RWA [risk-weighted assets] growth in the loan growth and therefore RWA growth.”
Featured image by Rafael Henrique/SOPA Images/LightRocket via Getty Images
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