BMO and Scotiabank set aside larger loan loss provisions as quarterly results send mixed signals


Bank buildings are pictured in Toronto’s financial district on June 27, 2018.

The Canadian Press

The Bank of Nova Scotia and Bank of Montreal added $ 3.2 billion more to reserves against future losses in the third quarter, bracing for the likelihood of a slower economic recovery as cases of the novel coronavirus increase in key markets abroad.

The two banks’ loan loss provisions were higher than analysts expected as they bolstered their defenses at the expense of current earnings. Scotiabank profits fell 34 percent from a year ago after the bank set aside nearly $ 2.2 billion to cover loans that could go wrong, while the 1, BMO’s $ 05 billion in new reserves helped drive down total profit by 26 percent.

Each lender has also seen the profits of its core retail banking divisions in Canada cut in half. But they were buoyed by robust returns from capital markets divisions which rode a wave of commercial activity and wealth management divisions which benefited from the resurgence in equity markets.

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Scotiabank and BMO were the first two major Canadian banks to report results for the fiscal quarter that ended July 31, sending mixed signals for the sector as BMO significantly exceeded analysts’ earnings estimates and that Scotiabank was unsuccessful. Although executives from both banks have said they see encouraging signs of recovery among consumers and businesses, the true health of their respective credit portfolios is still obscured by deferrals on hundreds of thousands of loans, including the most are about to expire soon.

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Betting the worst economic shocks of the pandemic are behind them, bankers said they were confident they had built up enough capital and enough provisions to absorb the losses. But they also adapt to the increasing probabilities of a prolonged and uneven return to pre-pandemic growth levels.

“As we looked at how, when economies opened up, we saw some jurisdictions struggling with a spike in [COVID-19] case… we think it’s a little more likely that it will take longer to fully recover than we thought three months ago, ”BMO CFO Tom Flynn said in an interview.

For the fiscal third quarter, Scotiabank posted profit of $ 1.3 billion, or $ 1.04 per share, compared to $ 1.98 billion, or $ 1.50, a year ago. On average, analysts expected earnings per share of $ 1.12, according to Refinitiv.

BMO reported earnings of $ 1.23 billion, or $ 1.81 per share, compared to $ 1.58 billion, or $ 2.34 per share, in the same quarter last year. After adjusting for some items, BMO said it gained $ 1.85 per share, well ahead of analysts’ consensus estimate of $ 1.66 per share.

Both banks have kept their quarterly dividends unchanged, after the country’s banking regulator advised them not to increase payments. And each raised their capital levels – Scotiabank’s Tier 1 (CET1) common stock ratio, an important measure of its ability to absorb losses and continue to lend, rose to 11.3%, while that the same ratio at BMO rose to 11.6% – as corporate customers repaid large sums taken from lines of credit at the start of the pandemic.

The next big test for banks will be the impending expiration of payment deferrals on a large number of mortgages, credit cards, personal and business loans. In Canada, Scotiabank has 236,000 deferred loans worth $ 41.5 billion, mostly mortgages, and another 2,330 loans totaling $ 18.1 billion on hold overseas. BMO continues to carry over 183,000 personal and business loans worth $ 29.4 billion in Canada, including 14% of its mortgage portfolio, and another 14,900 personal and business loans worth $ 1, $ 7 billion in the United States.

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Almost all of these deferrals expire before October 31 and will not be renewed, increasing the risk of default. So far, at least 90% of the clients of the two banks whose deferrals have already expired are making normal payments again, and Scotiabank Chief Risk Officer Daniel Moore has said he is “cautiously optimistic” that the rate of recovery would continue. His counterpart at BMO, Pat Cronin, estimates that only 1 to 5% of deferred loans can become unpaid after the expiration of grace periods.

Scotiabank and BMO were the two Canadian banks facing the lowest expectations as the earnings season approached, largely due to their respective reliance on Latin America and the United States, where COVID-19 infection rates have remained stubbornly high.

In Mexico, Peru, Chile and Colombia, where Scotiabank has focused its international ambitions, COVID-19 cases rose later than in Canada, and this delayed effect is expected to lead to an increase in the bank’s provisions. in the third trimester. International bank profits plunged 96% year-on-year to just $ 26 million as provisions rose and consumer activity slowed. But forecasts for economic growth in those countries are turning a corner and the bank expects provisions to decline next quarter.

“We are at the high water mark,” Moore said on a conference call. “We see the tide coming out of here.”

BMO’s U.S. retail banking arm has been more resilient as the most acute COVID-19 hotspots are outside the Midwestern states where the bank does most of its business, but profits have it all. likewise fell more than 28% to $ 263 million.

Profits at national retail banks also fell more than 50% at each bank, to $ 429 million at Scotiabank and $ 320 million at BMO, mainly due to higher provisions for credit losses. Credit lines tightened for the second consecutive quarter, under pressure from ultra-low interest rates.

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Still, both banks received a much-needed boost from capital markets divisions that made record profits, as volatile markets sparked a frenzy of trading with clients. Scotiabank’s Global Banking and Markets division posted profit of $ 600 million, up 60%, and BMO capital markets profits climbed 36% to $ 426 million. The resurgence of the markets also helped push BMO’s wealth management profit up 37% to $ 341 million.

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