Canada's Scotiabank, BMO Beat Profit Forecasts But See Challenges Ahead

Bank of Nova Scotia and Bank of Montreal reported better-than-expected second-quarter profits but forecast higher expenses and loan-loss provisions and slower mortgage growth, due to the impact of rising inflation and interest rates and a challenging economic environment.

Loan growth and credit quality were strong for both Canadian banks in the three months through April, driving higher revenues and lower provisions for credit losses (PCLs) from a year ago even as capital markets earnings pulled back due to recent market turmoil.

Shares of Scotiabank, whose adjusted earnings of C$2.18 per share handily beat expectations of C$1.96, jumped 3.7% to C$84.44 in morning trading in Toronto, compared with the broader stock benchmark's 1.1% gain.

BMO, which reported a more subdued beat of C$3.23 per share, versus the expected C$3.21, saw its shares rise 0.6%.

Both banks alluded to economic uncertainties on their calls with analysts, and said that while risks remain low, they expect some increases in PCLs and expenses.

PCLs at Scotiabank, Canada's third-biggest lender, fell to C$219 million in the quarter from C$496 million a year ago.

Scotiabank's chief risk officer, Phil Thomas, said on the call that the bank remains optimistic about customers' financial health but is "cognizant of the current economic challenges." PCLs have "reached the floor" and are expected to gradually increase during the rest of the year, he said.

Expense growth will also accelerate in the second half of 2022 but remain in the low-single-digit range, and mortgage growth will slow but stay in the high-single digits, Scotiabank executives said.

HIGHER EXPENSES

Both banks saw their adjusted expenses creep up from a year ago, with Scotiabank's up 3%, and BMO's rising 2%.

BMO executives forecast that expense growth excluding variable compensation would increase about 2.5% in coming quarters, driven in part by a 3% salary hike for some employees that was communicated last week.

BMO's PCLs decreased to C$50 million from C$60 million a year ago, although that was a reversal of recoveries made over the past three quarters. PCLs for impaired loans will drift back up to pre-pandemic levels, executives said, adding that the bank has increased the weighting of its adverse scenario in its stress testing.

Still, higher rates do bring benefits. BMO's net interest income, which rose 9% from a year ago, will continue to see strong growth as net interest margins "meaningfully expand," executives said.

Both banks were yet to see noticeable increases in margins, but nevertheless posted year-on-year increases of more than 20% in their Canadian businesses as mortgages grew and commercial lending recovery continued. Scotiabank's international business earnings rose 43% as PCLs fell and margins rose, while profit in BMO's U.S. unit increased 8%.

While Scotiabank's wealth management profit grew 9%, BMO's fell 4%. And both saw declines in capital markets earnings.

($1 = 1.2841 Canadian dollars)