August 30, 2016 / 11:37 AM / in a year

CORRECTED-UPDATE 3-Scotiabank reins in mortgage lending, stays vigilant

(Corrects identity of executive named in 3rd and 5th paragraphs to James O‘Sullivan, group head for Canadian Banking, from James McPhedran, executive vice president, Canadian Banking)

* Bank ceding mortgage market share -executive

* More mortgage applications being declined -executive

* Third-quarter earnings C$1.55 per share vs C$1.48 forecast

By Matt Scuffham

TORONTO, Aug 30 (Reuters) - Bank of Nova Scotia, Canada’s third-biggest lender, has pulled back on mortgage lending in its domestic market, potentially insulating itself if house prices fall in Vancouver and Toronto.

Canada’s banks face heightened scrutiny of their mortgage underwriting practices as authorities try to tackle the potential threat of a housing bubble in the two cities, where prices have soared.

“We’ve ceded some market share. That is very much a choice,” James O‘Sullivan, group head for Canadian Banking, told investors after the bank reported third-quarter earnings that beat analyst estimates.

“I think we’re being prudent, I think we’re being vigilant in this market but we’re not overly concerned. We believe we’ve constructed a very solid mortgage book here,” he said.

O‘Sullivan said Scotiabank was turning down more mortgage applications than it had done in the past.

“We have been taking progressive actions across a number of portfolios. Those would include tightening exceptions, tightening of originations and reduced pre-approvals,” he said.

Canada’s third-biggest lender earned C$1.55 per share in the quarter, up from C$1.46 a year earlier. Analysts had on average expected earnings of C$1.48 per share, according to Thomson Reuters I/B/E/S.

The bank benefited from a decline in funds set aside to cover bad loans to energy companies, with a partial recovery in the price of oil helping borrowers pay back credit.

Like other Canadian and U.S. lenders, Scotiabank had seen a rise in delinquent loans to energy firms due to weakness in the price of oil, which was at a 13-year low of $25 a barrel in January. But a 30 percent recovery in the price of oil during the latest quarter has alleviated some of those pressures.

Scotiabank’s provision for credit losses fell to C$571 million, a C$181 million decline from the last quarter.

The bank’s total net income rose to C$1.96 billion from C$1.85 billion previously. Its Canadian business grew its earnings by 8 percent to C$930 million during the quarter, benefiting from a 13-basis-point margin improvement.

Its international business saw earnings increase by 9 percent to C$527 million, driven by growth in Mexico, Peru, Chile and Columbia.

The bank announced a quarterly dividend increase of 2 cents per share to 74 cents.

Shares in Scotiabank were up 0.9 percent in early trading.

Rivals Royal Bank of Canada, Toronto-Dominion , Bank of Montreal and Canadian Imperial Bank of Commerce all reported results that beat market expectations last week. (Reporting by Matt Scuffham; Editing by Mark Potter and Bernadette Baum)

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