Scotiabank continued to deliberately slow its mortgage lending in the third quarter amid heightened economic risk and as part of its plan to be more selective with onboarding new clients.

The bank’s total Canadian residential mortgage portfolio fell to $294 billion as of the third quarter, down from about $300 billion in Q2.

“Lending volumes in the quarter reflect a more cautious environment from both a household confidence and business investment perspective as seen in activity levels across our various segments and geographies,” said President and CEO Scott Thomson in his prepared remarks during the bank’s third-quarter earnings call. “The impact of these macroeconomic realities coupled with a more selective and deliberate approach to new originations has resulted in a moderation of our loan growth.”

The bank announced earlier this year that it would intentionally slow its mortgage book and put a greater emphasis on growing deposits to lower its reliance on wholesale funding from larger investors.

Dan Rees, head of Canadian Banking, commented on the strategy again in the latest earnings call.

“So we are intensely decelerating our mortgage growth in favour of clients. And we launched in Q3 a really important pilot to deepen the deposit cross-sell off mortgages at the time of origination,” he said. “We’re being very intentional here as we signalled a number of quarters ago, and we’re really pleased with the cost of that deposit growth.”

The strategy has resulted in Scotia’s deposit growth, which was up 9% year-over-year or $55 billion, outpacing its loan growth.

“We’re being more disciplined with regards to customer selection at the time of origination,” Rees added. “I think this is a good time to drive that standard higher here because it’s a softer, slower housing market…We are also being more efficient with regards to our use of capital and using customer deselection at renewal as part of that conversation.”

Rees reiterated that the bank is still pleased with its mortgage business, including a new pilot program that it recently expanded in the broker channel. Scotia announced last month it would expand its bundled mortgage offering, in which it offers below-market rates to clients who open a chequing account and one other non-mortgage product, such as a credit card or line of credit. That program had previously only been available to select brokers as part of the pilot program.

“We’re very pleased with the pilot we put in place,” Rees said. “Sequentially, spreads expanded as we expected in the mortgage business. New spreads are good. And the deepening that we’ve done of the mortgages in the last 3, 4 quarters has been really encouraging.”

Rees also said Scotia, like its peer banks, has seen a shift of client preference into fixed-rate mortgages.

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

Q3 net income: $2.21 billion (-15% Y/Y)
Earnings per share: $1.73

	Q3 2022	Q2 2023	Q3 2023
Residential mortgage portfolio	$301B	$300B	$294B
Percentage of mortgage portfolio uninsured	72%	73%	74%
Avg. loan-to-value (LTV) of portfolio	46%	53%	47%
Portfolio mix: percentage with variable rates	37%	36%	34%
90+ days past due	0.15%	0.12%	0.14%
Mortgage portfolio gross impaired loans	0.26%	0.39%	0.45%
Canadian banking net interest margin (NIM)	2.29%	2.30%	2.35%
Total provisions for credit losses	$412M	$709M	$819M

Conference Call

• “Although the operating environment has stabilized following the Q2 market dislocation, deposit migration to term products and central bank rate increases continue to increase our funding costs,” said President and CEO Scott Thomson.
• “Through our advanced data and analytics, we are closely monitoring customer behavior and have observed a very rational and responsible shift in spending as households manage through this period of reduced discretionary income,” Thomson added.
• “While we continue to operate in an environment of heightened uncertainty, we believe our business is well-positioned to navigate this successfully,” said Chief Risk Officer Phil Thomas.
• “The improvement in NIM in the Canadian Bank will continue. As we pointed out, this quarter’s improvement was all deposit driven, and I think that will continue,” said Raj Viswanathan, Chief Financial Officer. “Asset margin is actually starting to show signs of growth…mortgage margin is starting to go up. So I’m optimistic that it will also contribute maybe modestly to next quarter so that you should see it happen.”

Source: Q3 Conference Call

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