Monday, September 27

BMO and Scotia soar past expectations, but consumer loan growth still languishing


Both banks benefited from large drops in provisions for credit losses

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Bank of Nova Scotia and Bank of Montreal posted third-quarter profits that towered over analyst expectations Tuesday, as the reopening of the economy following pandemic restrictions freed up millions of dollars in loan-loss provisions and gave once-stifled personal and commercial banking operations a boost.

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Canada’s third- and fourth-largest lenders both benefited from large drops in provisions for credit losses, which are funds that banks must hold in reserve to cover potential losses from loan defaults. At the outset of the pandemic last spring, banks set aside billions to cover possible sour loans due to job losses and business closures. But the loans did not perform as poorly as expected, and rising vaccination rates and easing economic restrictions have provided the banks with flexibility to release those contingency funds — even as the highly contagious Delta variant looms.

Scotiabank set aside $380 million for the fiscal quarter that ended July 31, down from $496 million in the second quarter, and $2.18 billion in the same period last year. BMO, meanwhile booked a $70 million recovery in provisions, a sharp pivot from the $60 million it stashed away in the second quarter.

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“Overall there is no denying that BMO put up another strong quarter in Q3,” Scotiabank analyst Meny Grauman said in a note to clients. “That said, it is important to highlight that the very large beat to the Street was driven by much lower -than-expected (provisions for credit losses) and elevated securities gains.”

Scotiabank earned $2.54 billion for third quarter, or $1.99 a share, up from $1.04 a share in the same period a year earlier. Adjusted to exclude certain items, the lender said it earned $2.01 per share, beating analyst expectations of $1.90 a share, according to Bloomberg data.

BMO reported $2.28 billion in profit, or $3.41 per share, compared with $1.81 per share in the same quarter of 2020. Adjusting for one-time items, the bank said it earned $3.44 per share, climbing past the average analyst estimate of $2.94 per share , according to Bloomberg.

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As pandemic restrictions ease and consumer spending picks up, analysts have also been watching for a rebound in loan growth, which slumped while Canadians — largely confined to their homes — pocketed their cash.

Scotiabank’s Canadian banking division reported a strong rebound from the same period last year driven largely by recoveries in provisions for credit losses, booking a profit of $1.08 billion, up sharply from $429 million. Revenue rose twelve per cent year-over-year led by fees and a ten per cent jump in residential mortgages as homebuyers flooded into the hot housing market. Business loans also jumped by seven per cent as owners shops re-opened restaurants, theatres, gyms and retail.

Profit more than doubled at BMO’s Canadian personal and commercial banking unit, climbing to $815 million. While it was also largely bolstered by lower provisions, the bank’s largest segment’s revenue rose 14 per cent from the previous year, propped up by a 12 per cent jump in mortgages and a two per cent increase in commercial loans.

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But the ongoing economic recovery has yet to move the dial on slumping personal loans, which have been a drag on bank revenues and signal that consumer spending has yet to return to pre-pandemic levels. Scotiabank saw a one per cent drop in personal loans and 10 per cent drop in credit cards from last year, while card balances were flat compared to the previous second quarter. Similarly, personal loans decreased one per cent and commercial fell 18 per cent at BMO.

“The spend levels that we’re seeing in Canada by retail customers (are) close to pre-COVID levels” said Scotiabank chief financial officer Raj Viswanathan during a virtual press conference on Tuesday, noting that they were “seeing a lot of activity” on credit and debit cards.

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In Scotiabank’s international division — which spans Central and South America and the Caribbean, but is focused primarily in Chile, Colombia, Mexico and Peru — that recovery has lagged by a quarter, Viswanathan said.

“We’ve seen some unsecured lending contraction in their balances, which we expect next quarter will be flat,” he said.

Profit in the international division still climbed to $486 million, boosted by a steep drop in provisions, even as economic and political pressures in the region continued to be a drag. Commercial loans fell eight per cent and personal loans and credit cards dropped 11 per cent , while residential mortgages slightly offset the dip with a six per cent gain over last year.

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“GDP forecasts across the Pacific Alliance countries have been trending higher, and travel to the Caribbean should recover with vaccination rates,” said CIBC analyst Paul Holden in a note to clients. “We see upside potential to consensus estimates when confidence in a more fulsome recovery takes hold.”

In the United States, BMO’s profit more than doubled to $553 million from a year earlier.

The banks’ capital markets divisions drew particular attention as the blistering pace of deals earlier this year that helped lift earnings has softened in the summer months. Profit at Scotiabank’s global banking and markets division 14 per cent from the same period a year prior.

But capital markets activity surged at BMO. Net income soared 31 per cent to $558 million from the year prior, also supported by lower provisions, as well as a four per cent boost in revenue from higher equities trading, new debt equity issuances and greater underwriting fees.

Wealth management boosted earnings at both banks as customers raced to capture high-flying valuations and to invest excess cash built up during the pandemic. Scotiabank’s wealth division — bolstered by the acquisitions of Jarislowsky Fraser and MD Financial Management in recent years — reported $390 million in profit, a 21 per cent jump from the same period a year earlier. BMO’s wealth division recorded an 18 per cent hike in revenue from the previous year.

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