If Canada is hurtling towards a mortgage “deferral cliff,” the Bank of Nova Scotia at least sees the potential for a soft landing.
On Tuesday, Scotiabank executives said customer requests to push back loan payments have plateaued and that added costs because of deferrals will be manageable for borrowers when they have to resume repayment.
“I would like to point out that requests for payment deferrals peaked in the first week of April here in Canada, and we are now tracking at significantly lower levels,” said Brian Porter, president and CEO of Scotiabank, during a conference call Tuesday morning.
Porter’s comments follow a warning last week by the head of Canada’s national housing agency that as much as one-fifth of mortgages could end up in arrears if the economy fails to recover this summer.
The looming mortgage “deferral cliff,” as Canada Mortgage and Housing Corp. president Evan Siddall called it, could deliver another blow to the earnings of Canada’s big banks, as all of them have been deferring thousands of payments as part of the COVID-19 relief efforts. An official from another federal agency, the Office of the Superintendent of Financial Institutions, also suggested in remarks earlier this month that deferred payments could present a new source of risk for the financial system.
Scotiabank is already feeling the effects of the coronavirus pandemic in other ways. Profits were 41 per cent lower for the quarter ended April 30 compared with the same period a year ago, although the bank still reported net income of $1.32 billion. The value of Scotiabank’s shares gained 7.4 per cent on Tuesday, rising to $55.84, suggesting the results were better than many investors were expecting.
Toronto-based Scotiabank, the country’s third-largest bank, also reported that the approximate uptake of its mortgage deferral program in Canada as of April 30 was 134,000 customer accounts and $38 billion in amounts outstanding, which is equivalent to around 17 per cent of its residential mortgages.
However, while interest on deferred mortgages continues to accrue and is being added to balances, Scotiabank sees the debt load and the added average impact of about $60 or so per payment over the life of the loan as manageable.
“There will not be any form of material impingement on our customers’ ability to pay, assuming an employment curve at the end of the deferral period,” Daniel Moore, Scotiabank’s chief risk officer, said on the call.
Daniel Moore, chief risk officer, Scotiabank
Beyond housing, Scotiabank’s fiscal second-quarter earnings were hit by the economic effects of COVID-19, investigations of the lender’s metal-trading activities and the winding down of its metals business.
When adjusted for several items, such as the acquisition and sale of several international businesses, net income was $1.37 billion, down from $2.26 billion in the same period in 2019. Earnings per share on an adjusted basis were $1.04, down by 39 per cent, but still above the analyst consensus of 91 cents per share.
The main cause of the drop in profit was the coronavirus pandemic and the attempts to rein in its spread with lockdowns and the closure of non-essential businesses.
Scotiabank set aside nearly $1.85 billion for possible loan losses for the second quarter, up 111 per cent from a year earlier, “largely due to the COVID-19 impact on the macro economic outlook,” the bank said in its financial filings. Porter said he anticipates provisions for credit losses will be higher than normal for the rest of the year, but that he expects to remain profitable.
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“We are well-positioned from a capital and liquidity perspective, and we are appropriately reserved for potential credit losses,” Porter said.
However, Scotiabank also said Tuesday that it had set aside $232 million tied to the decision last month to wind down its metals business, as well as because of investigations into metal-trading activities.
Scotiabank said in February that its “activities and trading practices in the metals markets and related conduct” were being investigated by the United States’ Commodity Futures Trading Commission and the U.S. Department of Justice’s Criminal Division. Additionally, the CFTC is investigating Scotiabank’s “practices and processes related to the provision of pre-trade mid-market marks and related conduct,” the lender said.
“The Bank continues to respond to requests for information related to these investigations and is engaging in settlement discussions with the applicable authorities,” Scotiabank said in its report to shareholders on Tuesday.
Scotiabank’s chief financial officer, Raj Viswanathan, said during the conference call that the probes were related to “legacy activities,” which date back to 2008. Although settlement talks and the wind-down are ongoing, Scotiabank said it “currently does not expect the final costs” associated with either matter to be material.
A silver lining of Scotiabank’s second-quarter earnings report was the contribution from its capital-markets division. The unit reported earnings of $523 million, up 25 per cent year-over-year on the back of a strong showing by its fixed-income trading business.
Scotiabank was the first of Canada’s Big Six banks to report fiscal second-quarter financial results, providing a potential preview of what is to come on Wednesday and Thursday, when other major lenders announce earnings.