Scotiabank not worried about credit quality despite higher loan loss provisions

Scotiabank not worried about credit quality despite higher loan loss provisions

BY DURRANT PATE
Observer Business Writer

Wednesday, September 16, 2020

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Scotiabank is expressing confidence about its credit quality in spite of an almost doubling of its loan loss provisions over the last six months and a tripling over the last year.

For the quarter ended July 31, 2020, the expected credit losses budgeted jumped to $2.58 billion coming from $1.77 billion the quarter before that ended in April this year. For the six-month period ended July 31, the credit loss provisions jumped to $5.25 billion coming from $1.92 billion the year before.

Scotiabank President and Chief Executive Officer David Noel admitted that the banking group's financial results have been significantly affected by its increased provisions for future credit losses due to the expected economic slowdown.

Speaking at the bank's third quarter news briefing on Thursday last, Noel declared that, “the vast majority of these provisions is not a reflection of our existing non-performing loans but is a conservative estimate for potential future losses which may or may not arise.”

He declared with much confidence that Scotiabank is unworried about the increase in loan loss provisions, arguing that “this is not an indication of the credit quality of the portfolio, which continues to be more favourable than the industry average (lower non-accrual loans to gross loans and higher loan loss provisions to gross loans).”

STRONG CREDIT QUALITY

Noel emphasised that despite the increase in provisions of Scotiabank's credit quality remains strong, articulating that the bank is well provisioned for the future to cover its loan portfolio. While conceding to a slight increase in its non-performing loan portfolio, which moved from 1.9 to 2.1 per cent of the total loan portfolio for the current period under review, Noel said this was better than the industry standard.

He noted that the banking group has made a prudent approach by putting aside funds to cover any future loss, which may arise, underscoring the point that Scotiabank is well provisioned for loan losses with accumulated expected credit loss provisions of eight billion over the past year. Scotia Group is also well provisioned with accumulated credit losses for performing loans increasing by $2.7 billion or 63 per cent since the onset of the COVID 19, thus ensuring significant coverage for possible future net write offs.

NON-ACCRUAL LOANS INCHING UPWARDS

Non-accrual loans (NALs) as at July 31, 2020 quarter had grown to $4.9 billion, up from $3.8 billion recorded for the same quarter last year. A non-accrual loan is an unsecured loan whose payment is 90 days or more overdue and thus the loan is no longer generating its stated interest rate because no payment has been made by the borrower.

The group's NALs represent 2.1 per cent of gross loans, up from 1.9 per cent last year, and represent 0.9 per cent of total assets. The group's aggregate expected credit losses for loans as at July 31, 2020 was $8.1 billion, representing 160 per cent overage of total non-performing loans, which is way above industry standards.


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