Scotiabank, BMO prepare for near-term loan weakness and better times ahead

TORONTO — The start of first quarter bank earnings saw Scotiabank and BMO put more money aside for loans that may go sour in the near-term, while they forecast better conditions ahead.

“We expect North American economic growth to remain subdued in the first half of this year, before recovering towards the end of the year on the back of lower interest rates,” said BMO chief executive Darryl White on an earnings call.

Scotiabank chief executive Scott Thomson similarly warned of a lull in the Canadian economy for the next few months, even as the bank’s Latin American markets show more promise, but all around his long-term outlook was positive. 

“Our official forecasts are no longer calling for recessionary conditions in any of our operating geographies over the next few years.”

Because of the short-term strain, both increased provisions for loan losses, Scotiabank at $962 million and BMO at $627 million.

But while the banks have similar outlooks, their first-quarter results diverged.

Scotiabank reported earnings that surprised to the upside, helped in part by its Latin American markets where interest rate cuts are already spurring increased activity.

BMO, meanwhile, struggled as it faced weakness in its U.S., insurance, capital markets and corporate divisions because of a range of factors including pending tax changes by the Canadian government, a shift in accounting standards and volatility in its hedge position.

The bank also pointed to subdued economic activity as a big culprit.

“Our first-quarter results were impacted by revenues that fell short of expectations due in part to environmental pressure,” said White.

The bank reported that adjusted revenue was down six per cent from the previous quarter, while Scotiabank reported a seven per cent gain from the previous quarter.

Scotiabank also reported better profit margins on its interest income, helped somewhat by a nine per cent increase in Canadian deposits. BMO, more exposed to the U.S. market where there’s heightened competition for deposits, reported its net interest margin slipped in part because of deposit pricing pressure.

Higher revenue and margins helped lead Scotiabank to a first-quarter income of $2.20 billion, up from $1.76 billion a year earlier. 

BMO reported net income totalled $1.29 billion, up from $133 million a year earlier when earnings were affected by the Bank of the West acquisition.

Scotiabank’s adjusted earnings came to $2.21 billion, while BMO’s were $1.89 billion.

BMO’s adjusted earnings per share came in at $2.56, down from $3.06 per share a year ago and lower than any quarter last year.

Its profit was also well below the $3.02 per share analysts had expected on average, according to estimates compiled by financial markets data firm Refinitiv.

“There is no way to put a positive spin a 15 per cent core (earnings per share) miss,” said Scotiabank analyst Meny Grauman on BMO’s results. 

Capital markets were a big drag for BMO, down 17 per cent on an adjusted basis from last year on lower trading revenue, while the impact from the proposed change to dividend deductions also weighed. 

Corporate services revenue was also down as the bank held more liquidity on its balance sheet, while market volatility had a negative effect on a hedge position. The bank expects quarterly revenues in corporate to run at around negative $200 million to $225 million for the rest of the year.

Scotiabank’s adjusted earnings worked out to $1.69 per diluted share in its latest quarter, down from $1.84 last year, but above the $1.61 per share expected by analysts. 

Both banks reported that their Canadian mortgage businesses remained muted, but they expect existing borrowers to be able to manage through higher payments.  

They also both said they’re seeing increased strain on consumers and unsecured loans. 

Scotiabank reported that its 90-day delinquency levels are up 0.08 percentage points from a year ago to 0.26 per cent, with rates up across all retail products from last year.

BMO noted consumer loan losses in Canada and the U.S. reflect higher delinquencies in credit cards and other personal loans, while Canadian insolvencies are now above pre-pandemic levels. 

Overall, banks are working to manage through the short-term strain while looking to prepare themselves for the potential rebound ahead.

“The banking environment is at a point in the cycle where the outlook for revenue growth is more constrained in the near term,” said BMO chief financial officer Tayfun Tuzun.

“We are focusing on investing for growth, allocating additional resources to areas where we have expanded our revenue opportunities through acquisitions and to businesses where we are capturing market share.”

This report by The Canadian Press was first published Feb. 27, 2024.

Companies in this story: (TSX:BNS; TSX:BMO)

Ian Bickis, The Canadian Press