(Bloomberg) -- 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$1.85 billion ($1.33 billion) for soured loans, less than analysts expected. Canada’s six biggest banks are expected to set aside C$8.9 billion 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.
“Scotia’s earnings produced a beat as credit was largely better than expected,” Barclays Capital Inc. analyst John Aiken said in a note to clients 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.”
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, amid the global financial crisis.
“While the bank’s second-quarter results were significantly impacted by the Covid-19 pandemic, we have remained fully operational and prioritized the health and safety of our employees,” Chief Executive Officer Brian Porter said in a statement Tuesday. “The bank remains well-positioned from a capital and liquidity perspective, and we are appropriately reserved for potential credit losses.”
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 totaled 0.47%, less than 0.5% a year ago.
International Banking
Scotiabank’s international banking business had the steepest profit decline in the quarter, falling 74% on higher provisions and lower contributions after selling off 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.
The Toronto-based company posted a 56% jump in trading revenue in the quarter, fueled by fixed-income, echoing the trend seen by Wall Street trading desks last month when they reported their best quarter 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$523 million.
Scotiabank also said it set aside C$232 million for U.S. 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$1.32 billion, or C$1 a share, from C$2.26 billion, or C$1.73, a year earlier. Adjusted earnings totaled C$1.04 a share, beating the 96-cent average estimate of 13 analysts in a Bloomberg survey.
(Updates with analyst comment, details of provisions starting in third paragraph.)
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