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Scotiabank's second-quarter profit down on restructuring, loan loss provisions

TORONTO – Scotiabank saw its second-quarter profit fall 12 per cent as it set aside more money for bad loans and took a restructuring charge related to the bank’s efforts to whittle down expenses.

“The restructuring charge we took this quarter reflects a widespread series of initiatives across the bank to improve our efficiency and become low cost by design,” Scotiabank president and CEO Brian Porter said during a conference Tuesday call to discuss the bank’s results.

“Many of these initiatives are anchored in our digital transformation.”

For example, more than 80 per cent of transactions are taking place outside of the branch network, said Porter. To respond to this shift, Scotiabank is revamping its branches to focus more on providing advice to customers rather than carrying out routine transactions that can be done online.

The bank is also planning to shrink its Canadian retail footprint — which currently consists of 1,006 branches — by about four or five per cent over the next two years.

“But I do want to be clear — branch transformation for us is about much more than just openings and consolidations,” said James O’Sullivan, Scotiabank’s group head of Canadian banking.

“It’s about a new branch format, it’s about more technology and it’s about new and better roles for our employees that involve less paper.”

Scotiabank (TSX:BNS) also boosted its provisions for credit losses to $752 million during the quarter, up from $448 million in the same period last year.

The company downgraded roughly 10 per cent of the companies in its energy loan book, adding nine names to its watch list.

Porter said loan losses in the energy sector are expected to decline next quarter.

Setting aside more money for bad loans, particularly to energy companies and consumers in oil-producing provinces, has been a common theme amongst Canada’s biggest banks in the second quarter.

The Bank of Montreal (TSX:BMO), CIBC (TSX:CM), TD Bank (TSX:TD) and Royal Bank (TSX:RY) — which reported their quarterly earnings last week — all saw their provisions for credit losses rise in the quarter.

Combined, the country’s five biggest banks raked in $8.12 billion of profit in the second quarter, up from $8.07 billion a year ago. That’s despite the fact that both Scotiabank and BMO had lower second-quarter results relative to last year.

Their collective quarterly revenues amounted to $33.11 billion, up from $30.45 billion in the second quarter of 2015.

National Bank, Canada’s sixth-largest lender, reports its second-quarter results Wednesday.

Morningstar analyst Dan Werner said the banks have done reasonably well in the second quarter in light of headwinds such as lower GDP, weak energy prices, rock-bottom interest rates and lower loan growth.

“I think the doom and gloom that oil has had on the stock prices of the banks has been a bit overblown,” said Werner.

Canadian banks with exposure to the U.S. market, such as TD and BMO, have benefited from the U.S. Federal Reserve’s decision to raise interest rates late last year, said Werner.

Low interest rates are bad for the banks because they reduce the amount of money the lenders can make by borrowing money at one rate and lending it out at another.

“It is a tougher environment with low rates,” said Werner. “There’s not much they can do until the Bank of Canada raises the benchmark rate.”

Scotiabank’s net income for the quarter was $1.58 billion or $1.23 per share, down from $1.80 billion or $1.42 per share in the same period last year.

After adjusting for the $278-million restructuring charge, which Scotiabank (TSX:BNS) announced earlier this month, the bank’s second-quarter profit rose four per cent to $1.86 billion, or $1.46 per share.

Revenue for the quarter was $6.59 billion, up from $5.94 billion a year ago.

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