BMO, Scotiabank are putting aside more money for loans that could go bad

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Canadians may have had flashbacks to the 2008 financial crisis last week when it looked like the collapse of Silicon Valley Bank was spreading before Washington stepped in. The bank turmoil adds to the economic uncertainty caused by inflation, rising food and gas prices and high interest rates. Ahead of the federal budget announcement on March 28, "The West Block" host Mercedes Stephenson speaks with Kevin Page, former Parliamentary Budget Officer and head of the Institute of Fiscal Studies and Democracy, and Lisa Raitt, former Conservative cabinet minister and vice chair of global investment banking at CIBC, about the state of Canada’s economy. – Mar 19, 2023

A combination of pressures including slowing economic growth and rising costs weighed on Canadian banks as they began to report second quarter results Wednesday.

Both BMO Financial Group and Bank of Nova Scotia reported higher expenses, more money set aside for bad loans, and thinner margins on interest that led both to earn less than they did a year ago and fall short of analysts’ expectations.

BMO chief executive Darryl White characterized it as a “shifting environment” that is putting pressure on revenue growth.

“The impact of persistent inflation, rising rates, a slowing global economy and an increasing deposit competition on the industry has accelerated. We’re not immune to these market forces,” he said on an analyst call.

His comments came as the bank reported a profit of $1.06 billion, down 78 per cent from a profit of $4.76 billion a year ago, due in part to adjustments related to its deal to buy Bank of the West. Revenue for the quarter totalled $8.44 billion, down from $9.32 billion last year.

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Scotiabank chief executive Scott Thomson said the quarter was marked by “challenging market conditions” as the bank reported net income down 21 per cent from a year earlier to $2.16 billion. Scotiabank’s revenue totalled $7.93 billion, down from $7.94 billion in the same quarter last year.

The results came after a quarter marked by turmoil in the U.S. banking system as several major banks, starting with Silicon Valley Bank, became unstable enough for regulators to force a sale.

The banking crisis was created in part by rapidly rising interest rates that have also put pressure on households carrying mortgages, and on the profit margins on bank interest as consumers seek out better rates on deposits.

“The recent market turmoil in the U.S. has added an element of financial uncertainty,” said Scotiabank chief risk officer Phil Thomas on a conference call with investors.

The bank said its Canadian mortgage portfolio remains solid despite higher rates as customers pull back on other spending.

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“Our customers are managing through this period of heightened interest rates by making trade-offs. For example, discretionary spending such as retail spending and entertainment is down 10 per cent year-over-year for our variable rate customers.”

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He said delinquency rates on loans are trending up modestly and that the bank expects provisions for bad loans to stay elevated for the year, but that he’s comfortable with how the bank is positioned for the economic cycles ahead.

BMO, which closed its US$16.3-billion Bank of the West deal in the quarter, said the failure of some U.S. banks added market volatility to the quarter.

“As we look ahead, we are cautious about the economic environment,” BMO chief risk officer Piyush Agrawal said.

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BMO provision for credit losses amounted to $1.02 billion in the quarter, up from $50 million a year earlier.

Scotiabank’s provisions totalled $709 million, up from $219 million a year ago.

Inflation also weighed in results as BMO reported expenses up 50 per cent in the quarter from last year, with costs associated with the Bank of the West acquisition making up the bulk of the jump, while Scotiabank reported expenses were up 10 per cent in the quarter from a year earlier.

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BMO’s adjusted earnings per diluted share came in at $2.93, down from $3.23 last year and below analyst expectations of $3.19 per share, according to estimates compiled by financial markets data firm Refinitiv.

Scotiabank says it earned an adjusted $1.70 per diluted share in its latest quarter, down from $2.18 in the same quarter last year and below the average analyst expectation for $1.78 per share according Refinitiv.

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