Bank of Nova Scotia, Canada’s third-largest bank by assets, reported a 6-per-cent increase in its fiscal third-quarter profit, driven by operational improvements, slower expense growth and lower loan losses to the struggling energy sector.
Declining losses on energy loans, coupled with a modest rebound in oil prices, have diminished fears about Scotiabank’s exposure to the oil patch.
But the two-year slump in commodity prices has hurt the Canadian economy and the lender’s results showed signs that more consumers are having trouble paying back their debts now.
“Last quarter, we indicated that energy-related losses had peaked and that our loss ratio would improve, which was indeed the case this quarter,” Brian Porter, Scotiabank’s chief executive officer, said during a conference call with analysts.
After hitting a high point during the second quarter, Scotiabank’s provisions for soured energy loans fell during the May-to-July quarter.
The bank set aside $37-million to cover bad loans to energy companies in the third quarter, down substantially from $150-million in the second quarter.
“In every cycle, we can expect some bumps along the way like we saw last quarter. But we believe that our overall energy book remains well positioned for the future,” Stephen Hart, Scotiabank’s chief risk officer, said during the call with analysts.
The bank’s exposure to the energy sector declined slightly, to $16.1-billion in loans, or 3.3 per cent of total loans – down from 3.4 per cent last quarter – after it cut back on loans to exploration and production companies and oil-field services.
A modest rebound in oil prices, to levels above $45 (U.S.) a barrel, has helped to quell investor anxiety on the banks’ energy exposures, even through oil prices remain down about 55 per cent since mid-2014.
The total amount of money set aside by Scotiabank to cover bad loans also declined, to $571-million (Canadian), down $181-million from the previous quarter. Royal Bank of Canada, Canadian Imperial Bank of Commerce and Toronto-Dominion Bank also socked away less money in the third quarter to cover bad loans.
However, one analyst noted an increase in impaired loans to retail customers at Scotiabank, raising the concern about bank exposure to indebted consumers in a weak economy. “While not overly troubling, it will likely bear additional scrutiny moving forward,” John Aiken, an analyst at Barclays, wrote in a note to clients.
Scotiabank reported a profit of more than $1.9-billion in its fiscal third quarter, up from about $1.8-billion last year. Its adjusted profit was $1.54 a share, topping analysts’ expectations of $1.48 a share and making Scotiabank the fifth consecutive bank this reporting season to exceed estimates.
Scotiabank raised its quarterly dividend by two cents a share, to 74 cents a share. The shares rose 1.2 per cent in Toronto, to $69.93, pushing the year-to-date gain to nearly 25 per cent.
Its Canadian retail banking division reported a profit of $930-million, up 8 per cent over last year, helped in part by a focus on cost-cutting. The bank took a $378-million restructuring charge in the second quarter, as it shifted resources from branch banking to online and mobile banking, and believes that the benefits to expense-savings and productivity have begun to appear.
In the third quarter, the number of employees in Scotiabank’s Canadian banking division fell by 929, or 3.5 per cent. The bank also closed nine branches.
Its international banking division – which is now focused on the Pacific Alliance countries of Mexico, Peru, Chile and Colombia – reported a profit of $527-million, up 9 per cent.
Global banking and markets, which includes capital markets, reported a profit of $421-million, up 12 per cent and in line with the double-digit gains reported by most of Scotiabank’s peers.
All five big banks that have reported results so far this earning season have beaten analysts’ expectations, driving shares higher. But the sector’s outlook continues to be clouded by credit concerns as banks face challenges related to the weak Canadian economy, low interest rates and indebted consumers.
National Bank of Canada, another lender with a relatively high exposure to the energy sector, will conclude the earnings season for the big banks on Wednesday.Report Typo/Error