BMO, Scotiabank exceed expectations as concerns about soured loans fade
Bank of Nova Scotia and Bank of Montreal are signalling that souring loans are becoming less of a concern.
Bank of Montreal set aside $156 million in provisions for credit losses in the fiscal first quarter, down 64 per cent from the previous three months and about a third of what analysts expected. The bank even had a $59-million recovery of provisions on performing loans, citing “an improving economic outlook” and positive credit trends. Scotiabank on Tuesday reported provisions of $764 million, down 32 per cent from the fourth quarter and 20-per-cent less than analysts projected.
Government COVID programs that supported consumers and businesses have helped prevent the surge in defaults that Canada's banks prepared for by recording massive provisions for loan losses early in the coronavirus pandemic. The banks also are benefiting from an increased focus on costs.
“Credit trends are better than what we expected last April or May or June — and that's a good thing,” Scotiabank chief executive Brian Porter said in an interview on BNN Bloomberg Television. “That speaks to the strength of the underlying economy, the strength of the Canadian household.”
Shrinking loan-loss reserves helped overall earnings as both banks topped analysts' estimates. Bank of Montreal, Canada's fourth-largest lender by assets, posted earnings of $3.06 a share, excluding some items, compared with the $2.15 average estimate of analysts in a Bloomberg survey. Scotiabank's adjusted profit of $1.88 a share exceeded the $1.57 average estimate.
Scotiabank shares rose 2.8 per cent to end the day at $74.10 in Toronto, while Bank of Montreal climbed three per cent to close at $104.90. Scotiabank shares have advanced 8.2 per cent this year, compared with a 7.7 per cent increase for Bank of Montreal and a 7.9 per cent gain for the S&P/TSX Commercial Banks Index.
Both lenders also benefited from cost cuts that helped make up for the drag the pandemic has put on revenue. Scotiabank, Canada's third-largest lender, cut non-interest expenses by 4.8 per cent from a year earlier, while Bank of Montreal reduced those costs by 1.5 per cent.
Recovering economies lifted results as well. Bank of Montreal's personal and commercial banking operation, which spans the U.S. and Canada, increased earnings by 26 per cent amid gains in residential mortgages in Canada and commercial loans in the U.S. At Scotiabank's Canadian banking unit, profit increased 6.9 per cent, helped by mortgages and business loans.
Bank of Montreal CEO Darryl White said he expects that strength to continue as COVID -19 vaccines are administered and governments introduce more support programs.
The banks' capital-markets units continued to benefit from the increased volatility and rising equity markets of the past year. Profit at BMO's capital-markets unit rose 36 per cent from a year earlier, driven by higher trading revenue, while earnings at Scotiabank's global banking and markets operations rose 46 per cent amid strength in fixed-income trading, equity underwriting and mergers and acquisitions.