Scotiabank misses estimates as energy loans turn sour

Bank of Nova Scotia on Tuesday reported second-quarter results which were below market expectations and increased funds set aside to cover bad loans by 40 percent as lending to energy companies turned sour. Scotiabank, which has the biggest direct exposure of the major Canadian banks to the oil and gas industry, followed rivals Royal Bank of Canada, Bank of Montreal and Canadian Imperial Bank of Commerce in reporting increased bad loan provisions.
Net income for the second quarter which ended on April 30, excluding the restructuring charge, was C$1.86 billion, or C$1.46 per share, compared with C$1.8 billion, or C$1.42 per share, a year earlier. Barclays' analyst John Aiken said the headline number included a C$100 million gain on the sale of assets, and without that, earnings were C$1.40 per share, below the average forecast for C$1.42, according to Thomson Reuters I/B/E/S.
"Given that its peers all beat expectations, coupled with additional deterioration in international credit and a still low energy coverage ratio, we would expect relative pressure on Scotia's valuation," he said.
Scotiabank said its provision for credit losses increased to C$752 million ($576 million) compared with C$539 million in the last quarter, driven primarily by exposure to the energy sector.
Aiken said the credit loss provision was well above consensus expectations of roughly C$620 million.
Oil prices touched 13-year lows in February, putting increased pressure on Canadian banks' energy clients and leading to rising loan defaults.
Energy companies across Canada and the United States have met with their banks in recent weeks to determine how much debt they can continue to hold as part of a bi-annual process that is still underway.
Scotiabank had previously said it would make cuts to companies' credit lines, potentially making it harder for some to survive.
The bank took a restructuring charge of C$278 million after tax relating to cost cutting measures, which Porter said would contribute to the digital transformation of the bank.
Banks around the world are cutting branches and staff, and investing in technology as more customers bank online rather than visit a branch. Bank of Montreal recently said it would shed 4 percent of its 46,000 workforce in a drive to cut costs.