The Bank of Nova Scotia said its profit slumped in the fourth quarter for a variety of reasons, but a major one was a more than doubling in the amount of money the bank sets aside to potentially write off loans that are in danger of not being paid back.
The bank reported its net income was $1.39 billion for the three-month period up until the end of October. That’s down by more than a third from the $2.09 billion it earned the same time last year.
Revenue came in at $8.31 billion, up from nearly $7.63 billion last year. But the bank was making less money because its costs rose by even more.
The bank’s expenses rose to $5.5 billion during the quarter, an increase of 22 per cent. The bank attributed its surging costs to “higher personnel costs, technology-related costs, performance-based compensation, business and capital taxes, share-based compensation, advertising and the unfavourable impact of foreign currency translation.”
In October, the bank announced it was laying off about three per cent of its workforce to rein in costs. On Tuesday the bank revealed it recorded a restructuring and severance charge of $354 million related to those moves.
Another major drag on the company’s earnings was money it sets aside to cover bad loans, a closely watched financial metric known as provisions for credit losses.
The bank set aside $1,256 million to cover such loans during the quarter. That’s more than double the $529 million worth of provisions it had this time last year.
Within that, the bank set aside $454 million to cover loans that are currently performing fine. That’s sharply up from $35 million of such loans last year.
The rest — $802 million — was for loans that are already underperforming, which means they aren’t being paid back as planned. That figure was $494 million last year.
“The increased provision this quarter was driven primarily by the unfavourable macroeconomic outlook and uncertainty around the impacts of higher interest rates,” the bank said of its higher loan losses.
Scotiabank also revealed that the size of its mortgage portfolio is getting smaller. The bank had just over $344 billion worth of home loans on its books at the end of October. That’s down from just over $349 billion this time last year.
Investors did not respond kindly to Scotiabank’s financial results, with the shares losing about five per cent of their value to trade at just over $57 apiece when the Toronto Stock Exchange opened for trading on Tuesday.
Scotiabank is the first of the Big 6 lenders to reveal quarterly financial results in the coming days. Royal Bank, TD and CIBC will reveal their numbers on Thursday, followed by Bank of Montreal and National Bank on Friday.