April 21, 2024

Scott Thomson stepped into his first round of financial earnings on Tuesday with a reassurance to investors that he plans to increase Bank of Nova Scotia’s BNS-T deposit base to build a source of lower-cost funding for lending, as narrowing net interest margins outweighed gains in its international banking business.

The newly minted chief executive officer, who has been in the top seat for one month, told investors that strategic changes are coming to Scotiabank. The lender reported financial results for the first fiscal quarter ended Jan. 31 that missed analyst expectations as narrowing net interest margins and climbing loan loss reserves weighed on profit.

On a conference call with analysts, Mr. Thomson outlined three key shifts – adjusting how the bank allocates capital across its business, targeting deposit growth to ease its funding costs, and boosting the number of products and services used by individual customers.

Banks fund loans using the money that customers deposit into products such as chequing and savings accounts, as well as wholesale funding from larger investors – the latter of which has become costlier as central banks have hiked interest rates. Core deposits provide a cheaper source of funding, and tend to boost customer loyalty to individual banks.

“We’ve always been known as growing through the loan book, and my focus is trying to bring more customer orientation where we can provide more value to customers beyond just the loan,” Mr. Thomson said in an interview with The Globe and Mail.

“Focus on deposits is so key, and it’s not just because of the cost of funding. It’s because through that relationship with the customer you get more intimacy, you understand how you can help them more and that allows you to provide more value.”

Scotiabank misses forecasts as profit falls on higher credit-loss provisions, weaker margins

Scotiabank is the third major Canadian bank to report earnings for the fiscal first quarter. Canadian Imperial Bank of Commerce released results last Friday, followed by Bank of Montreal early Tuesday, with both banks posting lower profit that still beat analyst expectations. Royal Bank of Canada and National Bank of Canada are set to announce results on Wednesday, followed by Toronto-Dominion Bank on Thursday.

Scotiabank’s share price slumped 5.7 per cent in Toronto on Tuesday on news of the decline in the bank’s net interest margin – the difference between what it earns on loans and pays on deposits. The lender’s stock has lagged those of rivals over the past decade.

“We have not delivered the level of total shareholder return that our shareholders should expect of us,” Mr. Thomson said during a conference call with analysts.

Lenders are facing slowing loan growth as high interest rates boost borrowing costs on lending products such as mortgages. Scotiabank’s net interest margin slumped to 2.11 per cent from 2.16 per cent in the same quarter last year, even as rates rose.

“We do not believe that expectations were high for Scotia in the first quarter but the miss will likely be viewed as a disappointment as margins declined in international” banking and were flat domestically, Barclays analyst John Aiken said in a note to clients.

In the second quarter, the bank may see some margin pressure, but that should ease in the latter half of the year as customers adjust to higher costs and central banks pause rates hikes, chief financial officer Raj Viswanathan said during the conference call.

Scotiabank earned $1.77-billion or $1.36 a share in the first fiscal quarter. That compared with $2.74-billion or $2.14 in the same quarter last year.

Adjusted to exclude certain items, the bank said it earned $1.85 a share. That fell below the $2.02 a share analysts expected, according to Refinitiv.

Analysts had expected Canada’s largest banks to raise loan loss provisions, ticking back up to prepandemic levels after the recoveries made in 2021. Scotiabank allotted $638-million in provisions for credit losses – the funds banks set aside to cover loans that may default – rising from $222-million in the same quarter last year. BMO and CIBC also set aside more money for potentially bad loans.

While its international banking arm – focused on Chile, Colombia, Mexico and Peru – posted a rise in net income to $654-million from $545-million, Mr. Thomson said on the call that the division’s overall “returns are not commensurate with our expectations in certain countries.”

But even as the bank looks at shifting its capital allocation strategy, Mr. Viswanathan said Scotiabank is first looking at how it can grow organically rather than leaving certain businesses.

“Divestitures are the last option,” Mr. Viswanathan said on the call. “I’m not saying we won’t exercise it at some point in time, but now is not the time.”

Total revenue fell 1 per cent from the same period last year to $7.98-billion while expenses grew 6 per cent to $4.46-billion, which the bank said was because of inflation-driven employee costs and technology investments.

Canadian banking profit decreased 9 per cent to $1.09-billion from a year earlier as higher revenue was offset by rising loan loss provisions and expenses.

Profit in the global banking and markets division was $519-million, a 7-per-cent decrease from the same quarter last year as higher costs and provisions for credit losses offset higher net interest income. And profit in the wealth management division fell 7 per cent to $385-million.

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