BANK OF NOVA SCOTIA PREACHES PRUDENCE ON MORTGAGES.
The Bank of Nova Scotia reported better than expected earnings Tuesday and said it is actively pulling back in domestic mortgage lending as worrying signs have emerged in the Vancouver and Toronto housing markets.
Canada’s third-biggest lender announced that it saw growth in both domestic and international banking, despite fears that slowing consumer borrowing and energy loan losses would weigh on earnings. Scotiabank reported earnings per share of $1.55 for the third quarter, compared with analyst expectations for earnings of $1.46.
During a conference call, executives with the company said that they were willingly ceding market share in the mortgage lending space amid signs of froth in the Canadian housing market.
Numerous institutions, from credit ratings agencies to the International Monetary Fund, have warned of the risks of a correction or crash in home prices to the Canadian economy.
“We have been taking progressive action across a number of ( mortgage) portfolios,” s ai d James O’Sullivan, executive vicepresident of Canadian banking. “We’re tightening exceptions, tightening organizations and reducing pre- approvals.”
O’Sullivan said that Scotiabank’s pullback in the mortgage market is “very much a choice.
“We’re being prudent — I think we’re being vigilant in the market, but we’re not overly concerned,” he said.
Housing prices in Canada have been continually hitting new records in the past few years, led by rapid gains in Vancouver and Toronto. The Teranet- National Bank composite house price index was up 10.9 per cent in July from a year earlier.
Last week, Royal Bank of Canada chief executive David McKay told analysts during a conference call that the lender is “closely monitoring” both Toronto and Vancouver’s real estate markets.
In June, Finance Minister Bill Morneau announced that a working group was being formed to examine the housing market, comprised of federal officials and representatives from the provincial and municipal governments of British Columbia and Ontario.
After releasing its secondquarter results in May, Scotiabank president and chief executive Brian Porter said the bank was easing lending in Toronto and Vancouver because of concerns about the pace of rising prices.
During Tuesday’s conference call, executives said that so far, the decision to scale back mortgage lending was part of a “prudent business decision.” Stephen Hart, chief risk officer for Scotiabank, said that the bank’s lending portfolio remained healthy and there weren’t signs of stress.
“In Canada, we are seeing some regional weakness in Alberta, but that is being offset by strength in Ontario and B.C.,” he said during the call.
Scotiabank also reported that the amount it had set aside to cover bad loans in the energy sector had declined for the quarter. The bank was seen as being among the most exposed to such loans, but a rebound in oil prices in the third quarter helped energy firms make payments.
“Provision for credit losses declined $ 181 million from last quarter,” said Porter in a statement. “The majority of the decline related to lower losses in the energy sector, which is consistent with our previously stated expectations that energy losses had peaked during the last quarter.”
For the energy sector specifically, Scotia said it set aside $ 37 million to cover bad loans in the third quarter, compared with the $ 150 million it set aside in the second quarter. Total loan exposure to oil and gas was also down — Scotia now has $ 16.1 billion in loans to the energy sector, or 3.3 per cent of its total portfolio. That is down from $ 16.3 billion in the second quarter, which was 3.4 per cent of its loan portfolio.
Overall, Scotiabank’s profit rose to $ 1.96 billion for the quarter, compared with $1.85 billion during the same time last year. Revenue hit $6.64 billion compared with $6.12 billion a year ago.
The results extended a win streak for Canadian banks, which have shrugged off fears of slowing consumer borrowing and damage to their balance sheets from bad energy loans. Toronto-Dominion Bank, Bank of Montreal, Royal Bank of Canada and the Canadian Imperial Bank of Commerce all reported better- than- expected earnings last week.
WE’RE VIGILANT, BUT WE’RE NOT OVERLY CONCERNED.