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Scotiabank, BMO Beat Estimates as Soured-Loan Concerns Ebb

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Kevin Orland
·4 min read
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(Bloomberg) -- Bank of Nova Scotia and Bank of Montreal are signaling that souring loans are becoming less of a concern.

Bank of Montreal set aside C$156 million ($124 million) in provisions for credit losses in the fiscal first quarter, down 64% from the previous three months and about a third of what analysts expected. The bank even had a C$59 million recovery of provisions on performing loans, citing “an improving economic outlook” and positive credit trends. Scotiabank on Tuesday reported provisions of C$764 million, down 32% from the fourth quarter and 20% less than analysts projected.

Government programs that supported consumers and businesses over the past year have helped prevent the surge in defaults that Canada’s banks prepared for by recording massive provisions for loan losses early in the coronavirus pandemic. The banks also are benefiting from an increased focus on costs that has helped blunt the impact of a more challenging revenue environment.

“Credit trends are better than what we expected last April or May or June -- and that’s a good thing,” Scotiabank Chief Executive Officer Brian Porter said in an interview on BNN Bloomberg Television. “That speaks to the strength of the underlying economy, the strength of the Canadian household.”

Shrinking loan-loss reserves helped overall earnings at both banks top analysts’ estimates. Bank of Montreal, Canada’s fourth-largest lender by assets, posted earnings of C$3.06 a share, excluding some items, compared with the C$2.15 average estimate of analysts in a Bloomberg survey. Scotiabank’s adjusted profit of C$1.88 a share exceeded the C$1.57 average estimate.

Scotiabank shares rose 3.3% to C$74.44 at 12:11 p.m. in Toronto, while Bank of Montreal climbed 2.4% to C$104.25. Scotiabank shares have advanced 8.2% this year, compared with a 7.7% increase for Bank of Montreal and a 7.9% gain for the S&P/TSX Commercial Banks Index.

Both lenders also benefited from cost cuts that helped make up for the drag the pandemic has put on revenue. Scotiabank, Canada’s third-largest lender, cut non-interest expenses by 4.8% from a year earlier, while Bank of Montreal reduced those costs by 1.5%.

Recovering economies in Canada and the U.S. lifted results as well. Bank of Montreal’s personal and commercial banking operation, which spans the U.S. and Canada, increased earnings by 26% amid gains in residential mortgages in Canada and commercial loans in the U.S. At Scotiabank’s Canadian banking unit, profit increased 6.9%, helped by mortgages and business loans.

Bank of Montreal CEO Darryl White said he expects that strength to continue as Covid-19 vaccines are administered and governments introduce more support programs.

‘An Increase’

“We’re looking at an increase in our view in the U.S., given the pace of the vaccine rollout as well as the higher probability of the stimulus package going through,” White said on a conference call with analysts. “In Canada, there is a slower pace of vaccine rollout, but we are equally positive in time.”

The banks’ capital-markets units continued to benefit from the increased volatility and rising equity markets of the past year. Profit at Bank of Montreal’s capital-markets division rose 36% from a year earlier, driven by higher trading revenue, while earnings at Scotiabank’s global banking and markets operations increased 46% amid strength in fixed-income trading, equity underwriting and mergers and acquisitions.

Scotiabank’s results were weighed down by its Latin America-focused international unit, which reported C$525 million in provisions for credit losses, more than double the set-asides at the Canadian banking unit. Still, the division reported net income of C$477 million, up 43% from the fourth quarter, as non-interest expenses declined and residential mortgages grew.

“International is a bit delayed in terms of the recovery, but they look to be on that path of normalizing international earnings by the end of this year,” Scott Chan, an analyst at Canaccord Genuity Group Inc., said in an interview.

(Updates with Scotia international results in 12th paragraph)

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