© Reuters. FILE PHOTO: The logo of the new Scotiabank is seen outside a branch in Ottawa, Ontario, Canada, on February 14, 2019. REUTERS/Chris Wattie
TORONTO (Reuters) – The Bank of Nova Scotia and Bank of Montreal reported better-than-expected second-quarter profits, but buoyed by rising inflation and interest rates and a challenging economic environment.
Both Canadian banks posted strong loan growth and credit quality in the three months to April, and despite the recent market turmoil leading to a pullback in capital market earnings, both banks posted higher revenue compared to a year ago , the provision for credit losses (PCL) decreased.
Scotiabank’s shares posted adjusted earnings of C$2.18 per share, easily beating estimates of C$1.96 a share, and rose 3.7% to C$84.44 in early Toronto trade, compared with a 1.1% gain for the broader stock benchmark.
BMO shares rose 0.6 percent to C$3.23 per share, missing expectations of C$3.21.
Both banks cited economic uncertainty in conference calls with analysts and said that while risks remain low, they expect PCL and fees to increase.
The PCL of Scotiabank, Canada’s third-largest bank, fell to C$219 million in the quarter from C$496 million a year earlier.
Phil Thomas, Scotiabank’s chief risk officer, said on a conference call that the bank remains optimistic about the financial health of customers but “recognizes the current economic challenges.” He said PCL had “bottomed out” and was expected to gradually increase over the remainder of the year.
Expense growth will also accelerate in the second half of 2022, but will remain in the low-single-digit range, and mortgage loan growth will slow but remain in the high-single digits, Scotiabank executives said.
Both banks’ adjusted fees climbed from a year ago, with Scotiabank up 3% and BMO up 2%.
BMO executives forecast expense growth excluding variable compensation to rise about 2.5% in the coming quarters, in part due to a 3% pay rise communicated last week for some employees.
BMO’s PCL fell to C$50 million from C$60 million a year ago, although this was the opposite of the recovery over the past three quarters. The PCL for impaired loans will return to pre-pandemic levels, executives said, adding that the bank increased the weight of adverse scenarios in the stress test.
Still, higher interest rates do have benefits. BMO’s net interest income, which rose 9% year over year, will continue to grow strongly as net interest margins “widen significantly,” executives said.
Neither bank saw a significant increase in profit margins, but its Canadian business grew more than 20% year-over-year as mortgages grew and commercial lending continued to recover. Scotiabank’s international earnings rose 43% on lower PCL and higher margins, while profits at BMO’s U.S. division rose 8%.
Scotiabank’s wealth management profit rose 9%, while BMO fell 4%. Both saw a decline in capital market returns.
($1 = CAD 1.2841)