Scotiabank reports Q4 profit up despite continued loan pressure

TORONTO — Scotiabank says it expects to see continued loan growth pressure and political uncertainty in the months ahead as it reported profits that were up from a year ago but below analyst expectations.

The bank kicked off year-end results for the sector on Tuesday as it reported a fourth-quarter profit of $1.69 billion, up from $1.35 billion in the same period last year, as it set aside a smaller amount for bad loans compared with a year ago.

Profits were hit by taxes and a writedown of its holding in a Chinese bank, while its Canadian operations were affected by the softening economy, said chief executive Scott Thomson.

“The realities of a slowing economy and the impact of peak interest rates made for a challenging operating environment,” he said on a conference call with analysts.

For the year as a whole, earnings grew “marginally” on modest loan growth, said Thomson, but that he expects the market to improve in the latter half of next year as interest rates continue to fall.

“We anticipate additional easing through the first half of the year, which we expect will be stimulative to activity in the domestic housing and mortgage markets and buoy consumer and business confidence,” Thomson said.

Fears of a rise in mortgage defaults has led all banks to set aside provisions for potentially bad loans, but a 1.25 percentage point drop in the Bank of Canada rate is already easing some fears.

Scotiabank set aside $1.03 billion in its fourth quarter, down from $1.26 billion a year ago, as it moved some loans of less concern out of the provisions entirely as borrower trends improved.

Fixed-rate mortgage customers were holding six per cent more in their deposit accounts in the quarter from the previous one, while 90-day delinquencies were down from the last quarter.

“We’re starting to see some green shoots as it relates to interest rates starting to come through,” said chief risk officer Phil Thomas.

But the overall drop in provisions did include a rise in the more serious category of impaired provisions, the kind the bank thinks it might not get paid back. For Canadian banking, impaired provisions rose to $461 million, up from $286 million last year.

A substantial part of the increase in provisions came from about 250 customers, primarily in Toronto and Vancouver, though many borrowers are feeling pressure, said Thomas.

“I think across our retail book in Canada, we’re definitely seeing some impact of higher for longer.”

The effects of higher rates helped lead to a thin one per cent rise in mortgage and personal loans this quarter from a year earlier in Canada, while credit card loans were up 12 per cent.

Revenue for the quarter totalled $8.53 billion, up from $8.27 billion in the bank’s fourth quarter last year.

Profits amounted to $1.22 per diluted share for the quarter ended Oct. 31, up from 99 cents in the same quarter a year ago.

Earnings rose even as the quarter saw Scotiabank take a $343 million charge related to its writedown of its investment in Bank of Xi’an Co. Ltd. in China related to the country’s weakened economy. It also took a $38 million severance provision for laid-off staff.

On an adjusted basis, Scotiabank says it earned $1.57 per diluted share in its latest quarter, up from an adjusted profit of $1.23 per diluted share a year ago.

The average analyst estimate had been for an adjusted profit of $1.60 per share, according to data provided by LSEG Data & Analytics.

Jeffries analyst John Aiken said the miss was largely from a higher-than-anticipated effective tax rate, while the bank also saw revenue headwinds and mixed performance on efficiency.

“While a higher tax rate weighed, Scotia had a solid performance, as top line growth held steady, costs were contained, and provisions were better than expected,” Aiken said.

The bank is the first of the Big Six to report its fourth-quarter results this week. Royal Bank of Canada and National Bank of Canada report Wednesday, while Toronto-Dominion Bank, BMO Financial Group and CIBC report Thursday morning.

Aiken said it’s difficult to see a clear read-through on Scotiabank’s earnings to the other banks given its mixed results, including the mixed picture on provisions, higher trading revenue but weaker advisory activity, mixed margins and weaker loan growth.

There could also be a mixed picture ahead given all the political change underway.

Thomson said that new governments, such as those in the U.S. and Mexico where Scotiabank is working to expand, bring uncertainty on trade policy and relations, but that he’s optimistic on the outcome.

“We believe policy will ultimately support a co-operative environment that encourages capital investment and continued regional growth.”

This report by The Canadian Press was first published Dec. 3, 2024.

Companies in this story: (TSX:BNS)

Ian Bickis, The Canadian Press