Scotiabank profit falls as bank sets aside almost $1.3B to cover bad loans

The Bank of Nova Scotia said its profit slumped in the fourth quarter for a variety of reasons, including doubling the amount of money the bank sets aside to potentially write off loans that are in danger of not being paid back.

The bank reported its net income was $1.39 billion for the three-month period up until the end of October. That's down by more than a third from the $2.09 billion it earned the same time last year.

Revenue came in at $8.31 billion, up from nearly $7.63 billion last year. But the bank was making less money because its costs rose by even more.

The bank's expenses rose to $5.5 billion during the quarter, an increase of 22 per cent. The bank attributed its surging costs to "higher personnel costs, technology-related costs, performance-based compensation, business and capital taxes, share-based compensation, advertising and the unfavourable impact of foreign currency translation."

In October, the bank announced it was laying off about three per cent of its workforce to rein in costs. On Tuesday the bank revealed it recorded a restructuring and severance charge of $354 million related to those moves.

The bank said it had 89,483 employees at the end of the quarter, down about 1,500 from the previous quarter or a little over halfway to its three per cent reduction target.

The bank also said it took an $89 million charge related to reducing its real estate footprint, and plans to close some branches. The bank said it had 2,379 branches and offices at quarter end, down 19 from three months earlier., though none of the branch closures it announced in the quarter have happened yet because of rules around giving months of notice to communities.

The bank didn't provide clarity in the quarter around how many branches in total it plans to shut, though it did confirm it would close eight branches in Newfoundland as part of a consolidation across various markets in Canada.

Another major drag on the company's earnings was money it sets aside to cover bad loans, a closely watched financial metric known as provisions for credit losses.

The bank set aside more than $1.2 billion to cover such loans during the quarter. That's more than double the $529 million worth of provisions it had this time last year.

Within that, the bank set aside $454 million to cover loans that are currently performing fine. That's sharply up from $35 million of such loans last year.

The rest — $802 million — was for loans that are already underperforming, which means they aren't being paid back as planned. That figure was $494 million last year.

"The increased provision this quarter was driven primarily by the unfavourable macroeconomic outlook and uncertainty around the impacts of higher interest rates," the bank said of its higher loan losses.

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Mario Mendonca, an analyst with TD Bank who covers Scotia, says the increase in impaired loans "suggests

conditions are deteriorating in Canadian personal loans and unsecured lines."

The bank had $498 million worth of residential mortgages that were "non-performing" at the end of October. That's up from $406 million a year ago but still a tiny percentage of their overall home loan portfolio, which came in at $271 billion during the quarter. That's a decline of four per cent or $11 billion from just over $282 billion a year ago.

"Mortgage delinquencies ticked higher, but remain low," Mendonca said.

Investors did not respond kindly to Scotiabank's financial results, with the shares losing about five per cent of their value to trade at just over $57 apiece when the Toronto Stock Exchange opened for trading on Tuesday.

Scotiabank is the first of the Big 6 lenders to reveal quarterly financial results in the coming days. Royal Bank, TD and CIBC will reveal their numbers on Thursday, followed by Bank of Montreal and National Bank on Friday.

Barry Schwartz, chief investment officer at Baskin Wealth Management, says he expects the rest of the bank's to show similarly gloomy numbers.

"I think you'll see other Canadian banks also increase reserves against future losses," he said in an interview with CBC News. "It's not a good look overall for the Canadian banks as we head into 2024. All we can hope for is that we escape a recession or it's very mild and that rates do get cut in the next three to six months."