Bank of Nova Scotia, Toronto, On

Scotiabank’s profits took a sizable hit last quarter as it felt the early effects of the slowing economy, and prepared for worse to come.

The bank on Tuesday kicked off the fourth quarter banking results by reporting a net income of almost $1.39 billion, or $1.02 per diluted share for the quarter ended Oct. 31, down from $2.09 billion or $1.63 per diluted share in the same period a year earlier.

The results were heavily weighed down by the amount of money it had set aside for potentially bad loans, as high interest rates are set to increasingly strain borrowers, along with charges related to the layoffs and branch closures it started in the quarter to lower expenses going forward.

Chief executive Scott Thomson, who joined the bank a year ago as president, said the results reflect a front-loading of costs that should translate to earnings growth ahead.

“We wanted to move quickly to address a lot of these issues around capital, liquidity, costs through the restructuring charge, allowances, and we’ve done that,” said Thomson on an analyst call.

“I realize 2023 has been a difficult year financially, but the actions taken have been decisive, deliberate and necessary.”

The bank said its provision for credit losses for the quarter amounted to nearly $1.26 billion, up from $529 million a year earlier.

Results also included a $354-million charge related to workforce reductions and other changes, and $87 million related to reducing its real estate footprint, both announced in the quarter as it said it would cut about 3% of its global workforce.

The bank said it had 89,483 employees at the end of the quarter, down about 1,500 from the previous quarter or a little over halfway to its 3% reduction target.

It said it had 2,379 branches and offices at quarter end, down 19 from the previous quarter, though none of the branch closures it announced in the quarter have happened yet because of rules around giving months of notice to communities.

The bank didn’t provide clarity in the quarter around how many branches in total it plans to shut, though it did confirm it would close eight branches in Newfoundland as part of a consolidation across various markets in Canada.

The reduced cost base comes as Thomson, who took on the role of CEO in February, prepares to release the bank’s new strategic plan next month, and also as headwinds increase in the economy.

For now, the bank says customers are managing despite the higher interest rates, with delinquencies still low. The clearest sign of strain is instead in savings levels that are starting to come down, along with spending, which it said was down 3% on credit and debit cards compared with the previous quarter.

“Our base case assumption is that economic growth will continue to moderate in the near term in North America,” said Thomson.

“Higher interest rates are having central bank’s desired economic impact, which we are seeing through moderating inflation and our own clients’ behaviour.”

But with the potential for interest rates to stay elevated, the bank has boosted provisions for bad loans much more than analysts had expected.

National Bank analyst Gabriel Dechaine said provisions were 40% higher than his forecast, which along with lower-than-expected revenue and higher expenses left earnings far below expectations.

On an adjusted basis, Scotiabank says it earned $1.26 per diluted share in its latest quarter, down from an adjusted profit of $2.06 per diluted share a year earlier.

Analysts on average had expected an adjusted profit of $1.65 per share, according to financial markets data firm Refinitiv.

Revenue totalled nearly $8.31 billion, up from nearly $7.63 billion in the same quarter last year.

Scotiabank’s Canadian banking operations earned $810 million in net income attributable to equity holders of the bank, down from $1.17 billion in the same quarter last year. The bank’s international banking business earned $562 million in net income attributable to equity holders of the bank, down from $643 million a year ago.

Scotiabank’s global wealth management operations earned $327 million in net income attributable to equity holders, down from $361 million a year earlier, while its global banking and markets business earned $414 million, down from $484 million in the same quarter last year.

The bank’s “other” category reported a loss attributable to equity holders of $759 million in its latest quarter compared with a loss of $603 million a year earlier.

Thomson said that while it’s been a challenging stretch, it expects the costs taken now will pay off ahead.

“A relentless focus on becoming more efficient, and appropriate allowances, will set the bank up for success going forward.”