Scotiabank's reductions may signal more industry pressure: analysts

Scotiabank to cut 1,500 jobs and close 120 branches at its international banking arm, after a $341-million hit after taxes to fourth-quarter earnings

TORONTO – Widespread cost reductions at Scotiabank, which include plans to cut 1,500 jobs, could be a sign of changes to come in Canada’s banking industry, several analysts suggest.

After sailing through years of global economic turbulence relatively unscathed, Scotiabank said Tuesday it will close 120 branches at its international banking arm, as it takes a $341-million hit after taxes to its fourth-quarter earnings.

Scotiabank (TSX:BNS) expects to remain on track to meet its 2014 financial objectives.

“Usually these types of changes tend to happen at the end of the fiscal year before the bonuses go out,” said Gareth Watson, vice-president of investment management and research at Richardson GMP in an interview.

“The fact that it’s happening now is not a shock at all.”

Canada’s biggest banks will begin to report their full-year financial results on Dec. 2, with Bank of Montreal (TSX:BMO) slated as first on the schedule.

In the meantime, Scotiabank’s move has raised questions as to whether the rest of the banks will make similar adjustments to their operations, as underperforming regions and slower overall growth add pressure to results.

“While some of the issues do appear to be specific to Scotia, the charges highlight ongoing concerns that the markets have towards the Canadian banks’ operations and growth outlook,” wrote Barclays analyst John Aiken in a note.

“We would expect that Scotia’s announcement will cast a shadow on the other banks as investors attempt to extrapolate meaning towards its peers.”

Shares of Scotiabank fell $1.42, or 2.1 per cent, to $67.37 on the Toronto Stock Exchange in afternoon trading.

While no branch closures were announced in Canada, the bank said two-thirds of the jobs will be cut in Canada, some at its head office.

Scotiabank said it will also centralize and automate some branch functions and make changes to its wealth management business.

“We’re comfortable with our footprint here in Canada, so I wouldn’t anticipate any branch closings here,” Brian Porter, Scotiabank’s president and chief executive officer, told analysts in a conference call.

The situation is different internationally. Scotiabank plans to close about 10 per cent of its branches outside of Canada, including in Mexico and the Caribbean region.

However, Porter, who has been Scotiabank’s top executive since Rich Waugh retired last November after a decade in the role, said the bank continues to invest in its international business.

“We’re putting a new core banking system in Mexico and we continue to invest in other channels like mobile banking,” Porter said.

“The frustration for us, across the international footprint, is that we’ve had very solid asset growth over the past three or four years and not all of that has dropped to the bottom line.”

Scotiabank said it expects to reduce annual costs by $120 million through the measures, but the full benefits won’t be seen until its 2016 financial year, which begins next November.

In addition to $148 million in restructuring charges, Scotiabank said it will take a number of other one-time items that will hit its bottom line including an additional $109 million of loan loss provisions related to the Caribbean region.

It will write down the value of its investment in a Venezuelan bank by $129 million and take a $47-million charge related to unremitted dividends from Banco del Caribe in Venezuela, due to a change in currency exchange rates.

Scotiabank said it will also take a $62-million charge related to an adjustment to its write-off policy on unsecured bankrupt retail accounts in Canada and a $55 million charge related to ongoing legal claims.

The bank also said it expected a $30-million charge as a funding valuation adjustment related to uncollateralized derivative receivables.

Such a varied group of charges typically occur at a Canadian bank when its headed into a crisis, said Robert Sedran, an analyst at CIBC World Markets.

“Although we do not think Scotiabank is in crisis, the charges do make it obvious to us that it is facing a challenging operating environment in several jurisdictions,” he said in a note.

Macquarie Securities analyst Jason Bilodeau outlined a number of elements he believes contributed to Scotiabank’s decision, including difficult operating conditions, changing business practices and an effort to reduce costs across its operations.

“It is not a positive that the bank finds itself in the position to require these charges, but the transitory impact is manageable,” wrote Bilodeau in a note.

“It looks like this is an effort to clean up a wide range of issues.”

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