Rising strain in auto loans and Canadian mortgages led Scotiabank to set aside more money in case they go bad, leading to a drop in second-quarter profits.

The bank said Tuesday its net income fell to $2.09 billion or $1.57 per diluted share for the quarter ended April 30, down from $2.15 billion or $1.68 per diluted share in the same quarter last year.

“The impact of higher rates is increasingly weighing on consumers,” said chief executive Scott Thomson on an earnings call.

“The reality of a higher-for-longer rate scenario will naturally result in a continuation of elevated credit provision in our retail portfolios.”

Scotiabank set aside $1.01 billion in the quarter for potentially bad loans, up from $709 million in the same quarter last year.

The rise, coupled with downward pressure on loan volumes, put the bank at the high end of its guidance on its provision for credit loss ratio.

Loans in Canadian banking were down 1% from last year, including mortgages down 5%, while business loans were up 8% and credit cards up 18%.

Used car loans are one of the bigger areas of stress for the bank, along with variable-rate mortgages, largely in the Greater Toronto and Vancouver areas, said chief risk officer Phil Thomas.

“Particularly our variable-rate customers and into our auto portfolio, we’re seeing friction in those portfolios,” he said on the call.

He said the bank’s “vulnerable” customers sat at 3,300 in the second quarter, up from 2,700 in the first quarter. Meanwhile, variable rate delinquencies rose 0.02% to 0.28%.

It will likely take some time for any interest rate cut to translate into relief for consumers, said Thomas, as a quarter percentage point drop by the Bank of Canada will result in about a $100 decrease in payments.

“It will take a few quarters … for it to start to really support the Canadian consumer.”

Despite some strain, overall revenue at the bank grew to $8.35 billion, up from $7.91 billion a year earlier.

On an adjusted basis, Scotiabank says it earned $1.58 per diluted share in its latest quarter, down from an adjusted profit of $1.69 per diluted share a year earlier.

The average analyst estimate had been for a profit of $1.56 per share, according to data provided by LSEG Data & Analytics.

The bank outperformed thanks to its international segment and its wealth management arm, said Jefferies analyst John Aiken.

He said credit performance was largely in line but still somewhat a concern.

“While impaired loan formations slowed somewhat in the quarter, they remain elevated, particularly in Scotia’s retail portfolios.”

The second earnings beat in a row was notable given the bank’s track record of misses in prior years, said National Bank analyst Gabriel Dechaine in a note.

He said he continues to view 2024 as a “no growth” year for Scotiabank, as the bank has somewhat guided as it works through a company-wide strategic shift.

“We believe weak loan growth and higher credit losses are some of the more important headwinds for the bank, which may extend into 2025.”

The bank could also breach its guidance on its loss rate as it’s already almost at the top end, he said.

Given Scotiabank’s focus on its strategic plan, the bank skipped its customary second quarter dividend boost, saying it expects to resume increases next year as growth picks up.

Scotiabank said its net income attributable to equity holders for its Canadian banking business totalled $1.01 billion, down from $1.06 billion a year earlier primarily due to a higher provision for credit losses and non-interest expenses, partly offset by higher revenues.

Meanwhile, it said its international banking operations earned net income attributable to equity holders of $671 million, up from $636 million in the same quarter last year.

The bank’s global wealth management business earned $380 million in net income attributable to equity holders, up from $353 million a year earlier, while its global banking and markets business earned $428 million in net income attributable to equity holders, up from $401 million a year ago.

Scotiabank’s “other” category reported a net loss attributable to equity holders of $421 million in its latest quarter, compared with a loss of $323 million last year.