Rising strain in auto loans and Canadian mortgages led Scotiabank to set aside more money in case they go bad, leading to a drop in second quarter profits.
The bank said Tuesday its net income fell to $2.09 billion or $1.57 per diluted share for the quarter ended April 30, down from $2.15 billion or $1.68 per diluted share in the same quarter last year.
“The impact of higher rates is increasingly weighing on consumers,” said chief executive Scott Thomson on an earnings call.
“The reality of a higher-for-longer rate scenario will naturally result in a continuation of elevated credit provision in our retail portfolios.”
Scotiabank set aside $1.01 billion in the quarter for potentially bad loans, up from $709 million in the same quarter last year.
The rise, coupled with downward pressure on loan volumes, put the bank at the high end of its guidance on its provision for credit loss ratio.
Loans in Canadian banking were down one per cent from last year, including mortgages down five per cent, while business loans were up eight per cent and credit cards up 18 per cent.
Used car loans are one of the bigger areas of stress for the bank, along with variable rate mortgages largely in the Greater Toronto and Vancouver areas, said Phil Thomas, chief risk officer.
“Particularly our variable rate customers and into our auto portfolio, we’re seeing friction in those portfolios,” he said on the call.
He said the bank’s ‘vulnerable’ customers went from 2,700 in the first quarter to 3,300 in the send, while variable rate delinquencies rose 0.02 percentage points to 0.28 per cent.
It will likely take several quarters for any rate drop to show relief, said Thomas, as a 0.25 percentage point drop by the Bank of Canada will result in about a $100 drop in payments.
“It will take a few quarters … for it to start to really support the Canadian consumer.”
Despite some strain, overall revenue at the bank grew to $8.35 billion, up from $7.91 billion a year earlier.
On an adjusted basis, Scotiabank says it earned $1.58 per diluted share in its latest quarter, down from an adjusted profit of $1.69 per diluted share a year earlier.
The average analyst estimate had been for a profit of $1.56 per share, according to data provided by LSEG Data & Analytics.
The bank outperformed thanks to its international segment and its wealth management arm, said Jefferies analyst John Aiken.
He said credit performance was largely in line but still somewhat a concern.
“While impaired loan formations slowed somewhat in the quarter, they remain elevated, particularly in Scotia`s retail portfolios.”
Scotiabank said its net income attributable to equity holders for its Canadian banking business totalled $1.01 billion, down from $1.06 billion a year earlier primarily to a higher provision for credit losses and non-interest expenses, partly offset by higher revenues.
Meanwhile, it said its international banking operations earned net income attributable to equity holders of $671 million, up from $636 million in the same quarter last year.
The bank’s global wealth management business earned $380 million in net income attributable to equity holders, up from $353 million a year earlier, while its global banking and markets business earned $428 million in net income attributable to equity holders, up from $401 million a year ago.
Scotiabank’s “other” category reported a net loss attributable to equity holders of $421 million in its latest quarter, compared with a loss of $323 million last year.