Scotiabank's earnings don’t bode well

Bank earnings season started not with a bang, but a whimper—one that could be sustained into 2024.

What happened: Scotiabank was the first of Canada’s Big Six banks to report earnings, missing profit estimates after setting aside a more-than-expected ~$1.3 billion to cover potential bad loans—a sign of what’s to come for other big banks later this week. 

  • RBC Capital Markets projected a 13% quarterly increase in loan loss provisions for the banking sector, up to $3.3 billion. And that now looks like an underestimate. 

Why it matters: Sure enough, when every Canadian bank shores up money for mortgage defaults —ya know, just in case—it’s a sign that Canadians are struggling to pay them. 

  • The surge in Black Friday shopping aside, Scotiabank reported customers with variable-rate mortgages have cut spending by 11% from a year ago as they deal with soaring rates. For comparison, fixed-rate mortgage holders cut their spending by 5%.

Yes, but: Loan loss provisions may be a drag on earnings, but they also ensure the stability of the country's banking system in case stuff hits the fan. Canada’s top financial regulator has consistently raised loan loss requirements lately and is set to do so again next month. 

Big picture: Scotiabank earnings were also brought down by rising expenditures spent on things like technology and personnel—factors also affecting other banks. To stop the money drain, banks have begun cutting costs, including ongoing layoffs at RBC and Scotia.—QH