Mortgage renewals lift Scotiabank margins as lending mix shifts

Scotiabank says mortgage renewals are improving returns from its $311-billion portfolio as the bank increasingly looks to higher-margin consumer and commercial lending for growth.

Canadian Banking head Aris Bogdaneris said non-mortgage lending outpaced mortgage growth during the third quarter for the first time in two years, supported by credit cards, business banking, unsecured lines of credit and commercial lending.

“As we renew the mortgages, you’re going to see the [risk-adjusted margin] lifting, and we saw that in the quarter as well,” he told analysts during the bank’s earnings call.

Scotiabank’s Canadian residential mortgage portfolio stood at $311 billion as of July 31, down from $315 billion in the previous quarter but 2% above the $306 billion reported a year earlier.

On an average-balance basis, Canadian mortgage loans were up 4% year over year. However, the bank’s lending mix is beginning to shift as growth outside the mortgage portfolio accelerates.

“We’ve talked about it many times: non-mortgage lending now is accelerating and actually passed mortgage growth in the quarter for the first time in two years,” Bogdaneris said.

The shift is part of Scotiabank’s effort to improve returns from Canadian Banking, which reported a return on equity of 19.4% in the third quarter.

The division’s net interest margin increased for a fifth consecutive quarter, reaching 2.38%. That was up two basis points from the previous quarter and nine basis points from a year ago, reflecting improved loan and deposit margins.

Mortgage delinquencies continue to rise

While credit performance improved across most of Scotiabank’s Canadian retail portfolio, mortgages remained an exception.

The share of mortgages at least 90 days past due rose to 0.34%, up from 0.32% in the previous quarter and 0.24% a year earlier.

Scotiabank said mortgage delinquencies continue to be affected by loans originated during the pandemic, with some of the pressure concentrated in Ontario and the Greater Toronto Area.

Among uninsured GTA mortgages, the 90-plus-day delinquency rate increased to 0.46%, compared with 0.41% in the second quarter and 0.29% a year ago. The equivalent rate in Greater Vancouver was 0.33%, up from 0.31% in the previous quarter and 0.24% last year.

Chief Risk Officer Shannon McGinnis said the bank was seeing better early-stage and late-stage delinquency trends across most Canadian retail products, helped by collection initiatives, but not yet in mortgages.

“While we are encouraged by the improving trends in impaired provisions and 90-day delinquency across most retail products, we continue to monitor some pockets of weakness, including elevated mortgage delinquencies,” she said.

“That being said, mortgage clients remain resilient and our overall retail portfolio quality remains strong.”

Canadian Banking provisions for credit losses declined to $498 million from $575 million in the previous quarter. Retail provisions fell by $66 million to $369 million, largely due to lower losses on unsecured lines of credit and improved auto-loan performance.

Canadian Banking earnings rise 12%

Canadian Banking generated earnings of $1.07 billion in the third quarter, up 12% from a year earlier, as record revenue and margin expansion were partly offset by higher expenses and provisions for credit losses.

Bank-wide adjusted net income rose 18% year over year to $2.97 billion, while adjusted diluted earnings per share increased 21% to $2.28.

Total provisions for credit losses were $1.08 billion, up 4% from a year earlier but down 11% from the previous quarter.

Scotiabank’s Common Equity Tier 1 capital ratio ended the quarter at 13.1%, down from 13.3% both a year earlier and in the second quarter.