Scotiabank's logo at a branch in Ottawa, Canada. Picture: REUTERS/CHRIS WATTIE
Scotiabank's logo at a branch in Ottawa, Canada. Picture: REUTERS/CHRIS WATTIE

Ottawa — Bank of Nova Scotia’s quarterly earnings plunged 41% after the lender set aside a record amount for loan losses, giving investors their first indication of how the coronavirus pandemic will affect fiscal second-quarter results at Canadian banks.

Scotiabank earmarked C$1.85bn for soured loans, less than analysts predicted. Canada’s six biggest banks are expected to set aside C$8.9bn for loan losses in the three months through April 30, triple the first-quarter total. At Scotiabank, earnings beat analysts’ estimates even with the increase in provisions and charges tied to its shuttered metals-trading business.

“Credit was largely better than expected,” Barclays analyst John Aiken said in a note to clients on Tuesday. Still, “the market was obviously expecting more reserves to be taken” and it’s likely “additional reserves will need to be taken in future quarters as the true impact of the pandemic will be felt”.

The lender’s shares rose 4.3% to C$54.21 before midday in Toronto. They have fallen 26% in 2020, compared with a 22% decline for Canada’s eight-company S&P/TSX Commercial Banks Index.

Scotiabank is the first large Canadian lender to report second-quarter results. The country’s six biggest banks are expected to post a 44% profit decline in the quarter, the median of estimates compiled by Bloomberg Intelligence. That would be the biggest drop since 2009.

CEO Brian Porter told analysts on Tuesday that he expects economic declines in the bank’s core markets for the balance of the year, followed by a return to growth in 2021 on a “gradual abatement of the pandemic” and reopening of economies. Loan losses will remain elevated for the rest of the year, he said.

‘Broken eggshells’

“Parts of the economy will snap back pretty quickly — the pent-up demand [and] the impact of the relief programmes the government has provided — will have its intended impact, but we’ve never been through this before,” Porter said. “This is not a one-quarter or two-quarter event. The banking sector will be picking up broken eggshells for a number of quarters here.”

Despite the surge in provisions, loans aren’t showing signs of deteriorating. Net impaired loans accounted for 0.53% of overall customer loans, down from 0.61% a year earlier, and net write-offs as a percentage of average loans totalled 0.47%, less than 0.5% a year ago.

Scotiabank’s international banking business had the steepest profit decline in the quarter, falling 74% on higher provisions and lower contributions after selling some of its overseas operations as it sharpened its focus in Latin America and the Caribbean. Earnings from Canadian banking plunged 42% as provisions rose, while the bank’s global wealth management and capital markets divisions posted higher income.

Trading jumps

The Toronto-based company had a 56% jump in trading revenue in the quarter, fuelled by fixed-income, echoing the trend seen by Wall Street trading desks in 2019 when they reported their best three-month period in eight years thanks to surging client activity during the most volatile period on record. That, along with higher investment-banking fees, helped boost earnings in Scotiabank’s capital-markets division by 25% to C$523m.

Scotiabank also said it set aside C$232m in 2020 for US regulatory probes into the bank’s metals-trading practices and costs tied to the wind-down of that business.

Net income for the three months ended April 30 fell to C$1.32bn, or C$1 a share, from C$2.26bn, or C$1.73, a year earlier.