Scotiabank posts earnings miss
The Bank of Nova Scotia on Tuesday became the latest Canadian lender to report second-quarter earnings watered down by higher estimates of possible loan losses, provisions prompted in part by accounting rule changes, a dimmer economic outlook and expanded credit portfolios.
Scotiabank, Canada’s third-largest lender, reported a profit of $2.26 billion for the three months ended April 30, up four per cent from the same quarter last year.
After adjusting for the various costs and gains on recent acquisitions and sales of assets, the bank’s earnings per share for its fiscal second quarter came in at $1.70, below analysts’ expectations and down a cent from a year ago.
Provisions for credit losses (PCLs) — money set aside to cover bad loans, which the banks must expense — rose year-over-year for Scotiabank’s second quarter, to $873 million from $534 million. Adjusted PCLs for the quarter were $722 million, up from $688 million in the previous quarter, which saw significant market volatility.
Scotiabank said international acquisitions, such as the lender’s purchase of a majority stake in a bank in Chile last year, had an impact on its PCLs.
“Credit quality remains high and the outlook is stable,” said Brian Porter, president and CEO of Scotiabank, during a conference call Tuesday morning.
“Growth in PCLs was substantially driven by acquisitions and volume growth. Our PCL ratio is in line with our long-term average.”
Scotiabank was not alone in seeing higher year-over-year PCLs for the period, but it is the only Big Five lender to have reported results so far this earnings season with higher PCLs in the second quarter of its fiscal year than the first.
Canadian Imperial Bank of Commerce, Royal Bank of Canada and Toronto-Dominion Bank reported higher second-quarter provisions last week compared to a year ago.
Bank of Montreal will report its second-quarter financial results on Wednesday.
In addition to growing loan books, the banks recently had to change the way they account for possible loan losses, looking to the future when tallying them up.
Scotiabank said its acquisition-related costs included “Day 1” provision for credit losses related to purchases in Peru and the Dominican Republic, as required by the IFRS 9 accounting standard it adopted in November 2017. Recently, Canada’s major lenders have come in for another round of scrutiny from short-sellers, most notably Steve Eisman, of The Big Short fame, who said in March that he was calling for “a simple normalization of credit” and said increases in provisions for loan losses “signalled pain that would drag down shares over time,” the Financial Times reported.
In a recent report, Hamilton Capital Partners Inc. pointed out loan losses and capital markets are two of the key drivers of volatility in bank earnings, and that lenders had “transitioned last year from an ‘incurred loss’ model (i.e., report losses when they occur) to an ‘expected loss’ model (i.e., book estimated losses before they occur).”
“Therefore, the banks now need to estimate the potential loan losses in their existing loan portfolios based on their expectations for changes in the broader economy,” the Toronto-based ETF manager said.
“Reduced visibility in this critical expense will very likely make it more difficult for analysts to forecast quarterly EPS (earnings per share), increasing the probability of beats/misses and resultant share price volatility.”
The Canadian economy has seen its forecast grow cloudier. Scotiabank noted its provisions on performing loans had been affected by several things, including “less favourable macro-economic inputs mainly in Canada.”
Canaccord Genuity analyst Scott Chan wrote in a note Tuesday that the bank’s adjusted PCLs were higher than the analyst consensus of $673 million.
“Larger relative total provisions … was the main variance to the EPS miss,” Chan said.
Porter said Scotiabank expects its financial performance for the second half of its fiscal year to be better than the first for several reasons, including further contributions from its recent acquisitions, ongoing growth from international banking and stronger output from Canadian banking. “And lastly, strong capital ratios, which provide the bank optionality.”
Credit quality remains high and the outlook is stable ... Growth in PCLs was substantially driven by acquisitions.