Why Scotiabank is cutting jobs while earning billions: Don Pittis

Why isScotiabankcutting 1,000 Canadian jobs while earning billions in profits? It seems crazy.

But in the end, it all comes down to a conflict between risk and prudence.

On Tuesday, the Bank of Nova Scotiaset aside nearly halfa billion dollars to cover the cost ofshutting down overseas branches and getting rid of 1,500 jobs,two-thirds of them here in Canada.

It's not as if Canada hasn't been good toScotiabank.

When the bank was in trouble from the international credit crunch, you, the taxpayers, werethere for them. Canada's third-largest bank and 10th-biggest company transferred billions in risky loans to taxpayers, leaving it free to lend that money again. At a profit.

That's not all.

In the Canadian mortgage market,Scotiabank, like Canada's other big banks, has benefited hugely from a business that can't seem to lose.

• BMO job cuts have little to do with sky-high profits
• Scotiabank to cut 1,500 jobs amid restructuring charges

The banksborrow money at low rates set by the central bank and lend it to homebuyers at higher rates,while taxpayers, in the form of the Canada Mortgage and Housing Corporation, insurethem against any losses.

But while we have been good toScotiabank,it has been good to us in its own way.

Unlike so many other banks around the world,Scotiabank and Canada's other big banks have been very good at not going broke. And it is to the advantage of all Canadians to encourage that.

Some sympathy

Many Canadians find it gallingto watch giant corporations earn billions of dollars while repeatedly cutting staff.

At the same time, we must have a certain sympathy for a giant corporation that suffers from what is effectively a split personality.Scotiabank is in a constant conflict betweenthe profitibily of big risks and the security of prudence.

For a member of an industry that might have a motto of"No fuss, no muss, no rough stuff," Scotiabankhas certainly had its little adventures.

Canadians may think of itas the homely consumer bank down at the corner. But since the1800s, one ofits specialties among Canadian banks has been conquering new international banking markets.

It was the first of the Canadian banks to fly the flag in Jamaica, opening a branch in Kingston in 1889.

It opened in Cuba in 1906, (closed by the Cuban revolution in the1950s).It expanded in Asia during the 1960 and '70s.

More recently, the bank has pushed into Latin America, serving a growing middle classand lending to business.

Each new adventure abroad has been backed by the security of the home economy.

That Asian expansionwas built on the back of Canada's postwar boom,when banks wereopening branches across our burgeoning suburbs.

More risk

The developing markets of theCaribbean, Asia and Latin America offered the kind of growth rarely seen in a mature economy.

But they also carry a larger quotient of risk.

Due to prudence, Scotiabankhas been quick to pull back in times of uncertainty, especially if that uncertainty is in its final port of safety, its Canadian home market.

Living in Asia during the 1980s boom, I often wondered whether Scotiabank hadn't regretted a previous retrenchment, having shut down much of its Asian expansion only a few years before.

This week, once again prudence won out.

It is right for the bank to be cautious about its stake inthe Venezuelan economy, where falling oil prices are only exacerbating political chaos.

Much has also been made of the new-broom effect as incoming chief executive Brian Porter cleans house and puts his stamp on the bank's strategy.

But it seems to me there is something else happening, andScotiabank is not the only bank thinking about it.

Victims of their own success

Falling oil prices and the possibility of rising U.S. interest rates could soon have a serious effect on one of thebanks'cash cows, the Canadian mortgage market.

It is telling that the benefits of the current cuts won't arrive till 2016, when some have predicted U.S. interest rate increases will start to bite.

In a way, the Canadian banks have been victims of their own success.

With higher profits year after year, fear ofa slump in earnings could drive shareholders away, slashing a bank's capital value andleading toa furthernegative effect on profits. A prudentCEO does not wantthat to happen on his watch.

The employees who will lose their jobsare unfortunate collateral damage.

But what Scotiabank may bedoing is getting risk off its books andbattening down to make sure it will be in good shape to withstand a potential storm.

Maybe the storm won't come. But it's good to be ready. That's only prudent.