Scotiabank Q2 Earnings: What Investors Should Watch

Rising stress in auto loans and mortgages prompted Scotiabank to increase its provisions for potential loan losses in the second quarter, contributing to a decline in profit and raising questions among analysts about near-term growth prospects. The bank reported net income of $2.09 billion, or $1.57 per diluted share, for the quarter ended April 30, down from $2.15 billion, or $1.68 per diluted share, in the same quarter a year earlier.

Chief Executive Scott Thomson said on the earnings call that higher interest rates are increasingly weighing on consumers and that a “higher-for-longer” rate environment will likely sustain elevated credit provisions in the bank’s retail lending portfolios. In Q2, Scotiabank set aside $1.01 billion for potential loan losses, up from $709 million in the comparable quarter last year. That rise, together with pressure on loan volumes, pushed the bank’s loss ratio toward the upper end of its guidance.

Loan balances in the Canadian banking segment fell 1% year over year. Mortgages declined about 5%, while business lending increased by 8% and credit card balances rose 18%. Chief Risk Officer Phil Thomas highlighted used-car loans and variable-rate mortgages—primarily concentrated in the Greater Toronto and Vancouver areas—as some of the more stressed parts of the retail book.

“We are seeing friction in our variable-rate and auto portfolios,” Thomas said. He added that the bank’s count of customers it classifies as “vulnerable” grew to 3,300 in the second quarter from 2,700 in the first quarter, and that delinquencies on variable-rate loans ticked up 0.02 percentage points to 0.28%. Thomas noted that even if the Bank of Canada begins to cut interest rates, the immediate relief for consumers would be modest — roughly a $100 monthly payment reduction for a quarter-point rate cut — and it will take several quarters for rate cuts to materially ease consumer payment pressures.

Analyst reactions to Scotiabank’s Q2 results

Despite credit headwinds, Scotiabank reported overall revenue growth to $8.35 billion for the quarter, up from $7.91 billion a year earlier. On an adjusted basis, the bank said it earned $1.58 per diluted share in the quarter, slightly below last year’s adjusted $1.69 but ahead of the consensus analyst estimate of $1.56 per share, according to LSEG Data & Analytics.

Jefferies analyst John Aiken noted that the bank’s international operations and wealth management business helped drive the outperformance. He observed that while impaired loan formations eased a bit during the quarter, they remain elevated, particularly in Scotiabank’s retail portfolios.

National Bank analyst Gabriel Dechaine described the results as the bank’s second consecutive earnings beat after a history of prior misses. Dechaine reiterated his view that 2024 will likely be a “no growth” year for Scotiabank as the bank executes a company-wide strategic transition. He also cautioned that weak loan growth and elevated credit losses are meaningful headwinds that could extend into 2025 and noted the risk that the bank could exceed the top end of its loss-rate guidance.

Will Scotiabank raise its dividend?

As Scotiabank focuses on executing its strategic plan and managing credit risk, the bank did not pursue its customary dividend increase in the second quarter. Management signaled an intention to resume dividend increases next year as growth recovers. For the quarter, net income attributable to equity holders in Canadian banking came in at $1.01 billion, down from $1.06 billion a year ago, primarily due to higher credit provisions and increased non-interest expenses, partially offset by revenue gains.

International banking delivered stronger results, with net income attributable to equity holders of $671 million, up from $636 million a year earlier. Global wealth management contributed $380 million in net income attributable to equity holders, rising from $353 million the previous year, and global banking and markets reported $428 million, up from $401 million year over year. Scotiabank’s “other” category showed a net loss attributable to equity holders of $421 million in the most recent quarter, widening from a $323 million loss a year earlier.

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