Mortgage loan growth and higher interest rates helped push Scotiabank’s earnings up in the second quarter, but rising rates are expected to slow the pace of loan growth going forward.
The earnings results reported Wednesday come as the Bank of Canada tries to reduce decades-high inflation with higher prime rates, making hefty mortgages pricier to carry.
Scotiabank chief risk officer Phil Thomas, however, said on an earnings call that while the bank is conscious of the macroeconomic headwinds, it still sees healthy financials for its loan portfolio as indicators such as credit scores have improved over the past two years.
“We’re very confident in the health of the Canadian consumer at this point,” he told analysts.
Scotiabank chief executive Brian Porter emphasized the stress testing the bank goes through, and noted that it is ratcheting up its scenarios given the changing financial landscape.
“Given the macroeconomic environment, we run stress tests that would have more harsh inputs today than we would have possibly a year ago.”
For now at least the bank is benefiting from trends in both central bank rates and real estate, as its net interest income grew 7% in the quarter from a year earlier, while loans grew 13% from last year.
In Canada, residential mortgage growth was up 16% from a year earlier, while business loans were up 19%.
The mortgage segment has started to slow though as prime rates increase, said Dan Rees, Scotiabank’s head of Canadian banking.
“You have seen some slowing in the mortgage growth … there are some markets, which have, obviously, grown more in the buyers’ favour, let’s say, based on softening.”
He said that the bank is down about 2.5% in mortgage growth sequentially, but still expects to see year-over-year growth for the remaining quarters to be in the high single digits.
The bank has also pushed further into sectors like agriculture, technology and transportation to further diversify its holdings, said Rees.
“So we’re less reliant on real estate now than we would have been a year or two ago.”
The changes in both the mortgage market and the wider macroeconomic environment mean this last quarter will likely be a floor for the bank’s credit loss provisions, the bank said.
Scotiabank is also not immune to the inflationary environment, reporting a 3% rise in expenses, including an 8% jump in expenses in the Canadian division from higher technology, personnel and advertising costs to support business growth.
The bank expects expenses to keep rising in the latter half of the year, but is still expecting overall growth in the low single digits as it has numerous discretionary costs it can adjust.
The bank said it would also moderate its share buybacks in the second half of the year as its capital position has ticked down to 11.6% from both buybacks and increasing its stake in Scotiabank Chile.
Still, the bank increased its quarterly dividend 3% to $1.03 per share.
The raise came as the bank reported a second-quarter profit of $2.75 billion, up from $2.46 billion in the same quarter last year.
The bank’s profit for the quarter ended April 30 amounted to $2.16 per diluted share, up from $1.88 per diluted share a year ago, as revenue totalled $7.94 billion, up from $7.74 billion.
Scotiabank’s provision for credit losses amounted to $219 million, down from $496 million in the same quarter last year.
On an adjusted basis, the bank said it earned $2.18 per diluted share for its most recent quarter, up from an adjusted profit of $1.90 per diluted share a year ago.
Analysts on average had expected an adjusted profit of $1.96 per diluted share, according to financial markets data firm Refinitiv.
Barclays analyst John Aiken noted that continued growth in the bank’s international division and the increased dividend were welcome news, as was the increased interest margin expansion as rates rise.
Scotiabank said its Canadian banking business earned net income attributable to equity holders of $1.18 billion in its latest quarter, up from $927 million in the same quarter last year, helped by higher revenues and lower provision for credit losses, partly offset by higher non-interest expenses.
International banking operations earned $605 million, up from $420 million a year ago, as the bank saw a lower provision for credit losses, lower non-interest expenses and higher revenues, partially offset by the negative impact of foreign currency translation.
The bank’s global wealth management arm earned $407 million, up from $372 million a year ago (up about 9%). The increase was driven by higher brokerage revenues, mutual fund fees, and net interest income supported by strong loan and deposit growth, the bank said.
Assets under management of $326 billion decreased $3 billion or 1% driven by market depreciation partly offset by higher net sales, the report to shareholders said. Assets under administration of $591 billion increased $24 billion or 4% due primarily to higher net sales, partially offset by market depreciation.
Global banking and markets business earned $488 million, down from $517 million in the same quarter last year.