Scotiabank is reporting success in its efforts to grow its deposits and increase profitability by doing more cross-selling to new mortgage clients.
In the first quarter, the bank said 70% of mortgage deals involved the bank’s new Mortgage+ product, which offers preferential rates for clients who bundle their mortgage with other eligible products, such as investments, insurance or credit cards. As a result, new mortgage clients now have an average of 3.2 products with the bank.
“Our approach to the mortgage business has evolved. We’re having good success with our bundled offerings,” President and CEO Scott Thomson said during the bank’s quarterly earnings conference call.
The bank welcomed 42,000 new primary clients in the quarter “on the back of better cross-sell and proactive engagement,” President and CEO Scott Thomson said during the bank’s quarterly earnings call.
“We are closely tracking client relationship depth and saw progress as the number of clients with three-plus banking products has seen a 50 basis point increase since the start of the fiscal year,” he added.
Last year, Scotiabank announced it planned to “intentionally slow” its mortgage portfolio to focus on growing deposits and lower its reliance on wholesale funding from larger investors.
“Deepening [the relationship] with existing customers of the loan portfolios is going to continue to be a prominent story going forward,” Dan Rees, head of Canadian Banking, said at the time.
The bank reported a 9% year-over-year increase in deposit growth within its Canadian banking portfolio.
Scotiabank also provided an update on the credit quality of its variable-rate mortgage portfolio, which has maintained “strong performance” despite a 475-basis-point rise in the Bank of Canada’s overnight target rate, as well as prime rate, since early 2022.
“We remained confident in the performance of our variable rate mortgage product, which has maintained strong credit performance despite unprecedented increases in borrowing costs,” Thomson said.
That’s despite variable-rate mortgage clients seeing an average 50% increase in their mortgage payments since the rate increases began.
Scotiabank is the largest mortgage lender to offer adjustable-rate mortgages, which are variable-rate mortgages with payments that fluctuate as prime rate rises or falls.
Unlike fixed-payment variable-rate clients at some of the other big banks, Scotiabank’s floating-rate clients don’t have to worry about hitting their “trigger rate” or experiencing negative amortization given that their payments automatically increased to cover the higher interest costs.
“I suspect with the [variable-rate mortgage] book you’ll start to see some further stress in that portfolio into Q2 into Q3,” said Chief Risk Officer Phil Thomas. “And it will be really the Bank of Canada rate decreases [expected later this year] that will start to pull in and have the biggest impact on the clients.”
While Scotiabank did see a rise in delinquency rates, they still remain below pre-pandemic levels.
The percentage of the bank’s residential mortgage portfolio that is now behind payments by 90 days or more rose from 0.16% in Q4 to 0.20% in Q1. Thomas said the delinquencies were higher in the variable-rate mortgage portfolio at 0.26% vs. 0.17% for the bank’s fixed-rate mortgage portfolio.
“Notably, the year-end multi-product clients have lower delinquency across their household balance sheets versus single-service and fixed-rate mortgage clients,” Thomas added.
The bulk of the bank’s fixed-rate mortgage clients will be impacted by higher rates as their terms come up for renewal in the coming years.
Q1 2023 | Q4 2023 | Q1 2024 | |
Residential mortgage portfolio | $302B | $290B | $288B |
Percentage of mortgage portfolio uninsured | 73% | 74% | 74% |
Avg. loan-to-value (LTV) of portfolio | 52% | 49% | 50% |
Portfolio mix: percentage with variable rates | 37% | 33% | 33% |
90+ days past due | 0.11% | 0.16% | 0.20% |
Canadian banking net interest margin (NIM) | 2.26% | 2.47% | 2.56% |
Total provisions for credit losses | $638M | $1.256M | $962M |
CET1 Ratio | 11.5% | 13% | 12.9% |
Source: Q1 Conference Call
Featured image by Pavlo Gonchar/SOPA Images/LightRocket via Getty Images
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