Bank of Nova Scotia signage in Toronto's financial district, on Sept. 8, 2023.Andrew Lahodynskyj/The Canadian Press
Bank of Nova Scotia BNS-T expects high interest rates to take multiple quarters to ease, leaving customers with little relief as risks mount for defaults in variable-rate mortgages and car loans.
While the lender had expected the Bank of Canada to introduce multiple rate cuts in the latter half of 2024, that trajectory feels “less certain,” Scotiabank chief executive officer Scott Thomson said during a conference call Tuesday to discuss the bank’s second-quarter earnings results. The higher cost of borrowing has strained consumer wallets as payments spike on mortgages and other types of loans.
“The impact of higher rates is increasingly weighing on consumers and, to a lesser extent, our commercial and small business clients,” Mr. Thomson told analysts. “The reality of a higher-for-longer rate scenario will naturally result in the continuation of elevated credit provisions in our retail portfolios.”
Scotiabank reported second-quarter profit that beat analyst expectations but fell from the same period last year, as the lender set aside more money for loans that could default, offsetting a boost from its capital markets and wealth divisions.
The lender set aside $1.01-billion in provisions for credit losses – the funds banks set aside to cover loans that may default. That was slightly lower than analysts expected, but higher than the $621-million in provisions set aside in the same quarter last year.
Over the past year, the country’s biggest banks have been ramping up provisions in anticipation of higher loan defaults as Canadians grapple with rising expenses and higher borrowing costs. Scotiabank’s higher provisions were driven by souring automotive loans, as well as mounting delinquencies in variable-rate mortgages – which have seen monthly payments jump as interest rates have surged – concentrated in Toronto and Vancouver’s heated real estate markets.
“There’s some talk about rate decreases in June and July, but I’m of the opinion that, even with those decreases in June and July, it’ll take a few quarters, maybe one, two or three quarters, for it to start to really support the Canadian consumer,” chief risk officer Phil Thomas said during the conference call.
For variable-rate mortgages, a 25-basis-point cut in interest rates would lead to a monthly payment decrease of about $100 on average, according to Mr. Thomas. (A basis point is one-100th of a percentage point.)
In the meantime, customers are adjusting their expenses to manage higher mortgage payments. Discretionary spending has fallen about 10 per cent for variable-rate mortgage customers, and 5 per cent for those with fixed-rate mortgages.
Scotiabank is the second major Canadian bank to report earnings for the second quarter. Toronto-Dominion Bank TD-T posted second-quarter results last Thursday that beat analysts’ estimates. Bank of Montreal BMO-T and National Bank of Canada NA-T release earnings Wednesday, and Royal Bank of Canada RY-T and Canadian Imperial Bank of Commerce CM-T report on Thursday.
Scotiabank earned $2.09-billion, or $1.57 per share, in the three months that ended April 30. That compared with $2.15-billion, or $1.68 per share, in the same quarter last year. Adjusted to exclude certain items, including expenses from the federal government’s tax known as the Canada Recovery Dividend, Scotiabank earned $1.58 per share, beating the $1.55 per share analysts expected, according to S&P Capital IQ.
In December, Scotiabank launched its new strategic plan aimed at growing its deposit base to reduce its funding costs and target businesses in North America, where it believes it can boost growth.
The bank grew its deposit base by 4 per cent compared with the same quarter last year, bolstered by increases in its Canadian and international banking divisions.
A large part of this strategy hinges on the bank’s ability to cross-sell products to its customers. More than 45 per cent of the bank’s retail clients now have three or more products with Scotiabank, an increase of 2.3 percentage points from the same quarter last year.
Scotiabank also bolstered its common equity tier 1 (CET1) ratio – a key measure of a bank’s ability to absorb losses – to 13.2 per cent in the quarter.
Since December, 2022, Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, has hiked the domestic stability buffer – a capital reserve that banks build to soften the blow of an economic downturn – to 3.5 per cent of a bank’s risk-weighted assets from 2.5 per cent. That has increased the minimum CET1 ratio to 11.5 per cent.
At the time, Scotiabank’s CET1 ratio was among the lowest of its peers, hovering just above the minimum requirement.