Bank of Nova Scotia BNS-T CEO Brian Porter says he sees a “disconnect” between the recession angst pervading Wall Street and Bay Street and the comparative confidence of Main Street businesses that are flush with cash and looking to expand.
When Mr. Porter visits clients across the bank’s footprint in Canada, the U.S., Latin America and the Caribbean, the general sentiment is “really quite bullish,” he told investors at a conference Scotiabank hosted in Toronto on Thursday. Business owners are thinking about expansion and growth, and “coping quite well with the inflationary pressures on their business in terms of passing along costs,” he said.
In large part, that is because of cash that some businesses and consumers stockpiled during the COVID-19 pandemic. From the largest corporations down to individual consumers, “balance sheets are in very good shape,” he said. Deposits from personal and commercial banking customers in Canada are 14 per cent higher than they were prepandemic, and Mr. Porter said he isn’t aware of a glut of excess inventory anywhere in the economy.
He acknowledged that excess liquidity combined with central banks’ aggressive pace of interest-rate increases as it tries to bring down high inflation are creating “some degree of turbulence” in economies and markets. But the view of his bank’s economists is that “we’re going through an adjustment period,” not charging toward a more painful downturn.
“I think there’s a real disconnect between Main Street and Wall Street or Bay Street in terms of the direction of the economy and feeling about the economy,” he said. “There have to be some conditions ... in place for – I don’t even like using the ‘R’ word – but for a recession. And we just don’t see those.”
Although Scotiabank fell short of profit estimates in its most recent fiscal quarter, which ended July 31, loan balances increased rapidly in its core retail banking divisions as customers in Canada and Latin America were keen to borrow money. In Canada, business loans were up 23 per cent year over year, and residential mortgages increased 14 per cent even though housing markets were cooling. And loan balances rose at a similar pace in the bank’s international arm, which is concentrated in Mexico, Peru, Chile and Colombia.
At Thursday’s conference, Mr. Porter also pushed back against concerns that banks are at risk from a slowing economy or upheaval in global markets. Canadian banks’ share prices have tumbled since they reported a mixed set of quarterly earnings in late August, and as a group, the major banks are trading at valuations that are well below their historical averages.
Responding to a question about Scotiabank’s capital levels – it currently has the lowest common equity Tier 1 (CET1) ratio among the Big Six lenders, at 11.6 per cent – Mr. Porter said evolving risk-management techniques have made banks less vulnerable.
When public-health restrictions from COVID-19 shut down large swaths of economies, banks raced to build up capital levels as a cushion against possible loan defaults and other losses. But “the arms race on capital’s over,” Mr. Porter said, and banks are now focused on holding “optimal” capital levels to avoid diluting returns to shareholders over the long term.
“Banks are not the nexus of risk that they once were, okay?” he said. “People are looking for the big accident and we’ve just been through the biggest stress test in my career. And portfolios performed very well under the circumstances.”