Bank of Nova Scotia has ramped up provisions for loan defaults as the U.S. trade war puts pressure on consumers and businesses.
The lender reported lower second-quarter profit that missed analysts’ estimates after it set aside higher loan loss reserves for rising risk among Canadian consumers and businesses. Analysts had expected banks to bolster loan loss reserves as the U.S. wages its trade war.
In the quarter, Scotiabank set aside $1.4-billion in provisions for credit losses – the funds banks set aside to cover loans that may default. That was higher than analysts anticipated and an increase from the $1-billion in provisions it booked in the same quarter last year.
The bulk of the increase came from $346-million for performing loans – debt that is still being repaid. In the first quarter of this year, Scotiabank had set aside $98-million for performing loans.
“Our outlook at the beginning of the year did not contemplate the current operating environment and associated uncertainty,” Scotiabank chief risk officer Phil Thomas said during a conference call with analysts. “Since then, trade tensions have further escalated.”
The provisions were earmarked for potential losses across the bank’s Canadian retail business and commercial loans in industries with greater exposure to higher tariffs than other sectors, including auto, agriculture and manufacturing. Scotiabank also posted higher provisions for performing loans in its Mexico division as the country’s economy is expected to weaken.
“While Scotia missed expectations, it was largely on the back of increasing allowances on performing loans as the economic outlook has admittedly deteriorated,” Jefferies analyst John Aiken said in a note to clients.
“Outside of that, the results were solid, notably with ongoing growth in its international segment and an increase in its capital ratio allowing for the first dividend increase in two years.”
Even amid trade and policy uncertainty in the United States, Scotiabank chief executive officer Scott Thomson said he is optimistic as Canada enters a period of political stability with the results of the recent federal election. The country should focus on improving productivity and building energy and natural resources infrastructure, he added.
“We’ve already seen a little bit more certainty in Canada as we’ve navigated this prime ministerial transition,” Mr. Thomson said during the call.
“You have Prime Minister Carney now in role with his cabinet, and a Natural Resources Minister who’s out in Calgary last week talking about the need to get things done. That is resonating very well with the business community.”
Scotiabank is the second major Canadian bank to report earnings for the fiscal second quarter. Last week, Toronto-Dominion Bank posted results that beat analysts’ estimates. Bank of Montreal and National Bank of Canada report Wednesday, and Royal Bank of Canada and Canadian Imperial Bank of Commerce release results on Thursday.
Scotiabank earned $2.03-billion, or $1.48 per share, a 3-per-cent decrease in the three months that ended April 30 compared with the same period the previous year.
Adjusted to exclude certain items, the bank said it earned $1.52 per share. That fell below the $1.57 per share analysts expected, according to S&P Capital IQ.
With provisions concentrated in the bank’s Canadian banking business, profit in the unit dropped 31 per cent to $613-million. Loan balances were up 4 per cent year-over-year.
The bank posted higher profits across its international, capital markets and wealth management businesses.
Scotiabank raised its quarterly dividend by 4 cents to $1.10 per share. It also plans to buy back 20 million of its shares.
Scotiabank shares closed at $72.91 on the Toronto Stock Exchange, up 1 per cent.
Editor’s note: A previous version of this article incorrectly stated that Scotiabank shares closed at $52.73 on the Toronto Stock Exchange. The closing price was $72.91.