Bank of Nova Scotia will record an after-tax gain of $175-million in its fiscal first-quarter results, driven by the sale of a large part of its stake in a bank in Thailand, but offset by a series of one-time charges.
Scotiabank preannounced four items that will affect its results for the quarter that ends Jan. 31, which will be reported on Feb. 25. The bank made the disclosure one day before chief executive officer Brian Porter is scheduled to discuss the bank’s outlook at a conference on Tuesday hosted by Royal Bank of Canada.
Scotiabank expects an additional $410-million in after-tax revenue for the period from a deal to reduce its 49-per-cent stake in Thanachart Bank Public Company Ltd., a Thailand-based lender, which was announced last August. But some of that gain will be offset by charges as Scotiabank makes more conservative allowances for credit losses, reforms the way it values certain derivatives and writes down the value of a piece of software that will soon be discontinued.
Most significantly, the bank is adding to the forecasts it uses to calculate its allowance for credit losses, which is funds set aside to cover potential losses on loans that are still being paid back but could become impaired. Until now, Scotiabank had used three scenarios that incorporate forecasts for economic indicators such as Canada’s gross domestic product growth, unemployment rate and housing price index: a base case that the bank considers the most likely outcome, as well as an optimistic and pessimistic scenario. Each is weighted based on how likely the bank believes it is to occur.
Scotiabank will add another, more pessimistic scenario, effective in the fiscal first quarter. And the bank estimates that by adding this fourth scenario, its total allowance for credit losses of $5.1-billion will rise by about $150-million, or $110-million after tax.
Over all, the bank’s existing pessimistic scenario has the most optimistic assumptions of any of Canada’s six biggest banks for the coming 12 months, according to a research report published last week by Darko Mihelic, an analyst at RBC Dominion Securities Inc. The difference in the allowance for credit losses between Scotiabank’s base case and its current pessimistic scenario is only $181-million, or 5.1 per cent, compared with a difference of $1.48-billion, or 111.3 per cent, at Bank of Montreal.
As Scotiabank rolls out an enhanced methodology for valuing derivatives, it will also record a charge of $120-million, or $90-million after tax, primarily related to uncollateralized over-the-counter derivatives. And it will book a $50-million charge, or about $35-million after tax, on a software asset that depends on third-party software that is being discontinued this year. The bank said it already has plans to replace the software.