Scotiabank avoids ‘deferral cliff’ for mortgages
Costs for borrowers seen as manageable; requests to delay loan payments peak
TORONTO If Canada is hurtling towards a mortgage “deferral cliff,” the Bank of Nova Scotia at least sees the potential for a soft landing.
On Tuesday, Scotiabank executives said customer requests to push back loan payments have plateaued and that added costs because of deferrals will be manageable for borrowers when they have to resume repayment.
“I would like to point out that requests for payment deferrals peaked in the first week of April here in Canada, and we are now tracking at significantly lower levels,” said Brian Porter, president and CEO of Scotiabank, during a conference call Tuesday morning.
Porter’s comments follow a warning last week by the head of Canada’s national housing agency that as much as one-fifth of mortgages could end up in arrears if the economy fails to recover this summer.
The looming mortgage “deferral cliff,” as Canada Mortgage and Housing Corp. president Evan Siddall called it, could deliver another blow to the earnings of Canada’s big banks, as all of them have been deferring thousands of payments as part of the COVID -19 relief efforts.
An official from another federal agency, the Office of the Superintendent of Financial Institutions, also suggested in a speech earlier this month that deferred payments could present a new source of risk for the financial system.
Toronto-based Scotiabank is already feeling the effects of the pandemic in other ways. Profits were 41 per cent lower for the quarter ended April 30 compared with the same period a year ago, although the bank still reported net income of $1.32 billion. The value of Scotiabank’s shares gained 7.4 per cent on Tuesday, rising to $55.84.
Scotiabank also reported that the approximate uptake of its mortgage deferral program in Canada as of April 30 was 134,000 customer accounts and $38 billion in amounts outstanding, which is equivalent to around 17 per cent of its residential mortgages. However, while interest on deferred mortgages continues to accrue, Scotiabank sees the debt load and the added average impact of about $60 or so per payment over the life of the loan as manageable.
“There will not be any form of material impingement on our customers’ ability to pay, assuming an employment curve at the end of the deferral period,” said Daniel Moore, Scotiabank’s chief risk officer.
Beyond housing, Scotiabank’s fiscal second-quarter earnings were hit by the effects of COVID -19, investigations of the lender’s metal-trading activities and the winddown of its metals business.
When adjusted for several items, such as the acquisition and sale of several international businesses, net income was $1.37 billion, down from $2.26 billion in the same period in 2019. Earnings per share on an adjusted basis were $1.04, down by 39 per cent, but still above the analyst consensus of 91 cents per share.
The main cause of the drop in profit was the fallout from the pandemic. Scotiabank set aside nearly $1.85 billion for possible loan losses for the second quarter, up 111 per cent from a year earlier, “largely due to the COVID-19 impact on the macro economic outlook,” the bank said in its financial filings.
Porter said he anticipates provisions for credit losses will be higher than normal for the rest of the year, but that he expects to remain profitable. “We are well-positioned from a capital and liquidity perspective, and we are appropriately reserved for potential credit losses,” he said.
Scotiabank also said Tuesday that it had set aside $232 million tied to the decision last month to wind down its metals business, as well as because of investigations into metal-trading activities.
Meanwhile, National Bank of Canada reported a 32-per-cent fall in quarterly profit on Tuesday, as it set aside $504 million to cover expected loan losses caused by the outbreak. Net income fell to $379 million, or $1.01 per share, in the second quarter ended April 30, from $558 million, or $1.51 per share, a year earlier.