Energy loans take toll on Scotiabank
Bank of Nova Scotia joined other Canadian banks taking a hit from higher energy-related provisions for loan losses in the second quarter, but a large chunk of Scotia’s woes were tied to a loan in Colombia that chief executive Brian Porter said he wishes was never made.
“There’s always one loan you wish you never did,” Porter told analysts on a conference call Tuesday to discuss the financial results, adding the arrangement was a “one-off” in this particular cycle that did not meet the bank’s usual standards.
Still, Scotia executives said Canada’s third-largest bank is “at the bottom of the fifth (inning)” in terms of the loans it will take related to the energy downturn, said Stephen Hart, the bank’s chief risk officer.
Hart said cumulative loan losses on Scotia’s exploration, production and oilfield services portfolio since the beginning of fiscal 2015 have totalled $277 million, or 1.7 per cent. Cumulative losses through the end of 2017 are expected to be between three and 3.5 per cent of that portfolio.
Total provisions for credit losses in the second quarter came in at $752 million, including a $50-million increase in the bank’s collective allowance for soured loans, up 68 per cent from a year earlier. Executives including Porter characterized the loan loss provisions in the just-completed quarter as a peak. They were up 40 per cent from the first quarter, and well above the roughly $620 million analysts were expecting, reflecting not just oil exposure but also “deterioration in international credit, according to Barclays Capital analyst John Aiken.
Scotia also took a pre-tax restructuring charge of $375 million to overhaul its branch network, invest in technology to “digitize processes” and enhance productivity, and to streamline the internal delivery of corporate services.
About five per cent of the bank’s current expenses are to be eliminated by 2019, chief financial officer Sean McGuckin said in the analysts call. Most of the impact will be in Canada, with about 30 per cent spread out over the bank’s other operations.
Scotia’s profit fell by 12 per cent in the second quarter, which ended April 30, as a result of the higher energy-related losses and the restructuring charge. Net income fell to $1.58 billion ($1.23 per share) from $1.8 billion ($1.42) in the corresponding period a year earlier.
Excluding the one-time items, Scotia’s profit was $1.48 a share, topping consensus analyst expectations of $1.42. Despite the earnings beat, Aiken, the Barclays analyst, noted that there was an eight-cent-per-share contribution from the sale of a lease financing business during the quarter.