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A Bank of Nova Scotia branch, in Toronto, on Feb. 11.Fred Lum/The Globe and Mail

Bank of Nova Scotia reported higher fourth-quarter profit as persistent shifts in customer behaviour during the COVID-19 pandemic helped drive losses on loans to a new low point, and demand for borrowing started to rebound.

Fourth-quarter profit rose 35 per cent from a year ago and the country’s third-largest bank raised its dividend by 11 per cent. Scotiabank also promised to buy back up to 2 per cent of its shares when it gets approval from Canada’s banking regulator.

Yet the bank’s quarterly revenue increased by just 2 per cent year over year, to $7.7-billion, and was flat in the 2021 fiscal year, as international banking revenue fell 3 per cent. Demand for secured loans, such as mortgages, has outpaced customers’ appetite for unsecured borrowing, such as credit cards and personal loans, which generate higher profits for banks. That shift squeezed lending margins that were already under pressure because of low interest rates.

The quarter that ended Oct. 31 capped off a fiscal year that chief executive Brian Porter described as a “transition year to the full earnings power of the bank” on a conference call with analysts on Tuesday. In 2022, he said Scotiabank is “well positioned to achieve” that potential, even though inflation is expected to drive up the bank’s costs, and the threat of a setback from a new COVID-19 variant clouds the bank’s outlook.

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Other Scotiabank executives also acknowledged the risk the Omicron variant could pose, but said the potential for a surge in infections or a prolonged pandemic are built into the bank’s current stress tests.

“We don’t know the impact of it,” said chief financial officer Raj Viswanathan, speaking to reporters. “But what we do know and what we have learned over the last two years is a lot, and that’s how good our portfolio is ... how resilient our customer base is ... and how we manage, from a risk perspective, what kind of customers we put on our books.”

In the fourth quarter, Scotiabank earned $2.6-billion, or $1.97 per share, compared with $1.9-billion, or $1.42 per share, in the same quarter a year earlier.

Adjusted to exclude certain items, the bank said it earned $2.10 per share. That was far above the consensus estimate of $1.90 per share among analysts, according to Refinitiv.

A sharp drop in provisions for credit losses – the funds banks set aside to cover loans that may go bad – was the driving force behind that outperformance. Scotiabank earmarked just $168-million in provisions, far shy of the $520-million analysts predicted, in part because improving economic forecasts allowed it to recover $343-million it had previously set aside as a precaution.

On Tuesday, Scotiabank chief risk officer Phil Thomas said unusually low loan losses are likely to last at least through 2023. The bank’s recent lending has tilted more heavily toward types of loans secured by collateral, such as mortgages and corporate loans, that pose lower risks to lenders than unsecured ones if borrowers default.

The downside of more secure lending is that it is less profitable. Scotiabank’s net interest margin on loans declined by six basis points compared with the third quarter, though is likely to increase over the coming year as central banks are expected to raise interest rates. (One hundred basis points equal one percentage point).

Rates are already rising in countries such as Mexico, Peru and Chile, which form the core of Scotiabank’s international arm. It has been slower to recover from the pandemic than Canada. Profit from the division was $607-million, up 82 per cent from a year ago, and loan balances increased by 3 per cent. But international revenue declined by 3 per cent, and profit excluding taxes and loan loss provisions was 2 per cent lower year over year.

In response, Scotiabank is aggressively cutting costs from its international operations. The bank took a $126-million restructuring charge in the quarter, closing 10 per cent of its international branches and cutting 7 per cent of full-time jobs outside Canada. That should boost the division’s quarterly profits by about $20-million per quarter after taxes.

The cuts were made possible by a rapid shift to digital banking in Latin America, where the portion of retail products Scotiabank sells digitally has doubled from 30 per cent to 60 per cent since 2019.

“While far from the resounding recovery that some in the market may have been looking for, there are signs of life in International and we believe that the outlook is improving,” John Aiken, an analyst at Barclays Capital Inc., said in a note to clients.

The bank also earmarked $62-million in “settlement and litigation provisions” tied to its former metals trading business, which was closed after it was ensnared in legal and regulatory problems.

Retail banking results in Canada were a bright spot, with profit of $1.2-billion, up 59 per cent compared with a year earlier, and 15 per cent from the third quarter. Residential mortgage balances surged 13 per cent higher, though that rate of growth should start to cool, reaching 6 per cent to 8 per cent in 2022, according to Scotiabank’s Canadian banking head, Dan Rees.

Business loans increased 11 per cent, and credit card balances increased 4 per cent from the third quarter, but are still lower than last year.

As the first major Canadian bank to report fourth-quarter earnings, Scotiabank was first to increase payouts to shareholders in nearly two years, after Canada’s banking regulator recently lifted temporary restrictions imposed in March, 2020. The bank raised its quarterly dividend to $1 per share from 90 cents – a larger increase than analysts predicted, though other banks are likely to announce even bigger dividend hikes this week.

Scotiabank plans to start buying back shares “immediately” once it wins approval from regulators and intends to be “very active in the market,” Mr. Porter said. Its plan to repurchase up to 2 per cent of its stock – about 24 million common shares – by the end of 2022 is a modest increase from a rate of 1.3 per cent annually prior to COVID-19.

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