Bank of Nova Scotia, Toronto, On

Scotiabank’s loan growth slowed last quarter as the bank took a more cautious approach to lending amid heightened strain on borrowers from higher interest rates.

“Lending volumes in the quarter reflect a more cautious environment from both a household confidence and business investment perspective,” chief executive Scott Thomson told a conference call with investors and analysts to discuss the bank’s latest results Tuesday.

The bank reported in its third-quarter report that while loans were up 7% from last year, they were down 1% from the second quarter.

Scotiabank also reported a 1% decline in its residential mortgage balances.

“We deliberately slowed the mortgage book as we signalled some time ago,” Dan Rees, Scotiabank’s head of Canadian banking, told the conference call.

“We’re just being more disciplined with regards to customer selection at time of origination. I think this is a good time to drive that standard higher here because it’s a softer, slower housing market.”

The pullback in lending is also part of the bank’s efforts to improve its balance between loans and deposits. The bank has been working to boost its deposit base because banks have also faced higher borrowing costs, and customer cash left at the bank is a cheaper source of funding than the alternatives.

Also part of its preparation for headwinds ahead, the bank nearly doubled the amount of money it was setting aside in the quarter for potentially bad loans. It boosted its provision for credit losses to $819 million in its latest quarter, up from $412 million in the same quarter last year.

But while the bank has taken a more restrained approach, Thomson said he’s encouraged to see borrowers take needed steps as they face higher interest rates.

“We are closely monitoring customer behaviour and have observed a very rational and responsible shift in spending as households manage through this period of reduced discretionary income.”

Variable-rate mortgage customers, who have seen the rates they are charged march steadily higher, have adjusted spending down 15% year-over-year, the bank said.

The higher provisions and other pressures did however weigh on results, which showed the bank earned $2.21 billion or $1.72 per diluted share for the quarter ended July 31, down from $2.59 billion or $2.09 per diluted share a year earlier.

Revenue for the quarter totalled $8.09 billion, up from $7.80 billion.

On an adjusted basis, the bank says it earned $1.73 per diluted share, down from an adjusted profit of $2.10 per diluted share a year ago.

Analysts on average had expected an adjusted profit of $1.74 per share, according to estimates compiled by financial markets data firm Refinitiv. Higher-than-expected credit loss provisions were cited as the biggest reason for the miss.

Scotiabank’s global wealth management operations earned $366 million in net income attributable to equity holders, down from $376 million a year earlier, while its global banking and markets business earned $434 million in net income attributable to equity holders, up from $378 million in the same quarter last year.

Scotiabank’s Canadian banking operations earned $1.06 billion in net income attributable to equity holders, down from $1.21 billion a year earlier due to the higher provisions and non-interest expenses, partly offset by higher revenue.

The bank’s international banking business earned $628 million in net income attributable to equity holders, up from $625 million in the same quarter last year.

The bank’s “other” category reported a loss of $299 million in its latest quarter compared with a loss of $52 million a year earlier.

Scotiabank also announced the appointment of two new members to its board of directors Tuesday.

The company said former HSBC Bank Canada chief executive Sandra Stuart and Michael Medline, chief executive at Empire Company Ltd. and Sobeys Inc., have been appointed to the board.