Canada’s big banks wrapped up the very first quarter from the fiscal year with increased profits and widely expected dividend hikes. However the early impact from the oil rut was evident, with an increase of provisioning and reports of accelerating credit card and loan delinquencies within the hardest hit provinces, primarily in Western Canada.
Scotiabank hikes dividend as profit rises, but oil woes are registering
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Bank of Nova Scotia, the last to report for that period ending Jan. 31, beat analyst estimates by a handful of cents using the results released Tuesday.
Like Toronto-Dominion Bank, Royal Bank of Canada, and Canadian Imperial Bank of Commerce before it, Canada’s third-largest bank raised the quarterly dividend to be paid to shareholders. Scotia boosted the dividend nearly three percent to 72 cents a share.
Despite one fourth referred to as solid by financial analysts, Scotia executives followed other bank officials by acknowledging a less pretty picture for clients hit by the plummeting price of oil.
Canadian banks are starting to determine the impact of the oil rut in their corporate lending books and in their consumer loan portfolios. Pockets of unsecured lending, including credit card debt and some auto loans, are expected to become the toughest hit with the unemployment rate in Alberta now over the national average.
The amount of cash Scotia set aside in credit loss provisions rose to $539 million the first quarter, up from $463 million a year ago, with the increase driven mainly by higher provisions within the gas and oil sector and in the Canadian retail portfolio.
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Impaired loans in the gas and oil portfolio doubled from the previous quarter to $336 million, and executives said about five per cent of energy loans take presctiption a “watch list,” which Scotia’s chief financial officer Sean McGuckin characterized as an early warning system for potential defaults.
Loans on this list could go back to the “fully performing” list if conditions improve or steps are taken to lessen the bank’s exposure to losses, he said within an interview using the Financial Post.
Scotia’s chief risk officer Stephen Hart said low oil costs are causing more energy companies to trip covenants on their own loans, resulting in negotiations using the bank.
“Just because someone trips a covenant does not mean they’re seconds from default,” he was quoted saying on a morning conference call with analysts. Negotiations are aimed at improving the position from the bank to ultimately recover funds, regardless of the result’s for the borrower.
Despite the continuing energy issues, Scotia reported an uptick in overall profits in the first quarter.
Net income rose to $1.81 billion ($1.43 a share), from $1.73 billion ($1.35) last year.
An growth of domestic margins allowed the bank to “earn with the energy provisions,” John Aiken, an analyst at Barclays Capital, said in a note to clients.
Excluding an item related to amortization, Scotia said the earnings came in at $1.44 a share, beating the consensus analyst estimate of $1.42.
“At first blush, the results seem to be reasonably clean, using the purchase of JPM’s (JP Morgan) credit card portfolio adding a penny to earnings and helping to increase domestic retail margins,” Aiken wrote.
McGuckin said charge card delinquencies are rising in Alberta, but improvements across the rest of the country more than counterbalance the trend in the first quarter.
Alberta represents about 15 per cent of Scotia’s Canadian loan book, with unsecured exposures of roughly $2.5 billion, based on Peter Routledge, an analyst at National Bank Financial.
On the corporate side, Routledge said it is sensible for Scotia to become working with gas and oil companies, easing covenants, for instance, in return for a lower loan commitment, better security, or perhaps a better price for that bank.
“A bank includes a much better possibility of getting repaid on its Oil & Gas loans entirely if a borrower is constantly on the operate, instead of a decision to make a borrower out of business in order to seize the collateral for ultimate resale,” he said in a note to clients.
“A decision to help ease covenant restrictions in return for a lower commitment, for example, will lower the bank’s ultimate risk in return for supplying the client with more financial flexibility,” Routledge wrote. “This decision might have a client in going concern status and, thereby, lower the prospect of default with that loan.”
