Scotiabank Q3 profit beats expectations as high deposit levels reduce risk

The head of Scotiabank says a big jump in deposits over the course of the pandemic has allowed the bank to reduce its credit loss provisions as part of a trend that could last years.

“Whether it’s through government stimulus or through changing consumer preferences and changing consumer behaviour, we’ve seen a remarkable increase in our deposit balances,” said Brian Porter, chief executive of Scotiabank on an earnings call Tuesday.

The bank says checking balances in Canadian retail are up 53% compare with pre-pandemic level, while its international banking division has seen deposits climb about 20%.

Higher savings and liquidity have helped push down delinquencies, and improved the risk profile of its loan portfolio, said Porter.

“That, we think, is with us for quite some time…If we see spending go back to pre-Covid levels, the Canadian consumer on our balance sheet has two years of additional liquidity.”

In response to the healthier balance sheets and economic outlook, Scotiabank cut its provisions for credit losses by $1.8 billion, or 83%, to $380 million in the third quarter compared with a year earlier, and down from $496 million in the second quarter.

The reduced provisions helped boost its profit to an expectation-beating $2.54 billion or $1.99 per share in the quarter ending July 31, up from $1.30 billion or $1.04 in the same quarter last year.

On an adjusted basis, Scotiabank says it earned $2.01 per diluted share, up from an adjusted profit of $1.04 per diluted share in the same quarter last year.

Revenue totalled $7.76 billion, up from $7.73 billion in the same quarter last year.

Analysts on average had expected the bank to report an adjusted profit of $1.90 per share, according to financial market data firm Refinitiv.

Scotiabank said its Canadian banking division earned net income of $1.08 billion, up from $429 million last year, driven by lower provisions for credit losses and higher revenues.

International banking saw earnings of $486 million, compared with $26 million last year, boosted by lower provisions for credit losses and lower non-interest expenses.

The bank’s wealth management business reported earnings of $390 million, up from $321 million last year as it saw an increase in mutual fund fees and brokerage revenues.

Scotiabank’s global banking and markets division earned net income of $513 million, down from $600 million last year, on lower net interest income, non-interest income and foreign currency effects.

John Aiken, head of research (Canada) at Barclays, said in a note that while Scotiabank performed well in its Canadian and wealth divisions, much of the growth in its international division was attributed to reversals on allowances for loan losses while revenue growth and lending were weak.

“Consequently, we believe that the lingering concerns regarding growth in the segment are likely to remain coming out of the quarter,” he said.

On Tuesday, Craig Gilchrist said he’s stepping down as managing director and head of ScotiaMcLeod Inc. to become vice-chairman and head of Scotiabank’s Global Family Office Group.

Todd Barnes, who has served as managing director for the Toronto region at Scotia Wealth Management since 2013, will take over as head of ScotiaMcLeod.