BMO and Scotia beat expectations, but consumer loan growth still languishes

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Both banks benefited from sharp declines in bad debt provisions

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The Bank of Nova Scotia and Bank of Montreal posted third quarter profits that beat analysts’ expectations on Tuesday, as the economy reopened following pandemic restrictions freed millions of dollars in loan loss provisions and gave once-stifled personal and business banking operations a boost.

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Canada’s third and fourth largest lenders have both benefited from large declines in provisions for credit losses, which are funds banks must keep in reserve to cover potential losses from defaults. At the start of the pandemic last spring, banks set aside billions to cover possible bad loans due to job losses and business closings. But the loans have not yielded the expected results, and increasing vaccination rates and easing economic restrictions have given banks the flexibility to unlock these contingency funds, even as the highly contagious Delta variant. , looms.

Scotiabank set aside $ 380 million for the fiscal quarter that ended July 31, up from $ 496 million in the second quarter and $ 2.18 billion in the same period last year. BMO, meanwhile, recorded a recovery of $ 70 million in provisions, a turning point from the $ 60 million it hid in the second quarter.

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“Overall, there’s no denying that BMO had another strong third quarter,” Scotiabank analyst Meny Grauman said in a note to clients. “That said, it’s important to point out that the very big beating of the streets was driven by much lower than expected securities gains (provisions for credit losses) and high securities.”

Scotiabank earned $ 2.54 billion in the third quarter, or $ 1.99 per share, compared to $ 1.04 per share in the same period a year earlier. Adjusted to exclude certain items, the lender said it was making $ 2.01 per share, beating analysts’ expectations of $ 1.90 per share, according to Bloomberg data.

BMO reported earnings of $ 2.28 billion, or $ 3.41 per share, compared to $ 1.81 per share in the same quarter of 2020. After adjusting for one-time items, the bank said it earned 3.44 $ per share, exceeding the average analyst estimate of $ 2.94 per share. , according to Bloomberg.

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As pandemic restrictions loosen and consumer spending increases, analysts are also watching a rebound in loan growth, which collapses as Canadians – largely confined to their homes – pocket their money.

Scotiabank’s Canadian banking division posted a strong rebound from the same period last year, in large part due to the recovery of provisions for credit losses, posting a profit of $ 1.08 billion, up sharply up from $ 429 million. Income was up twelve percent year-over-year, driven by fees and a ten percent jump in residential mortgages as homebuyers poured into the booming housing market. Business loans also jumped 7% as owners reopened restaurants, theaters, gyms and retail stores.

BMO’s personal and commercial banking business in Canada more than doubled profits to $ 815 million. Although it was also largely supported by the decline in provisions, the income of the bank’s largest segment grew 14% year-over-year, supported by a 12% jump in mortgages and a 2% increase in commercial loans.

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But the ongoing economic recovery has yet to act on the decline in personal loans, which have weighed on bank income and signal that consumer spending has yet to recover to pre-pandemic levels. Scotiabank posted a 1% decline in personal loans and 10% in credit cards from a year ago, while card balances were flat from the previous second quarter. Similarly, personal loans were down 1% and business loans were down 18% at BMO.

“The spending levels that we are seeing in Canada by retail customers (are) close to pre-COVID levels,” Scotiabank CFO Raj Viswanathan said at a virtual press conference on Tuesday, noting that they “saw a lot of activity” on credit and debit cards.

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In Scotiabank’s international division – which covers Central America, South America and the Caribbean, but mainly focuses on Chile, Colombia, Mexico and Peru – this recovery is a quarter behind , said Viswanathan.

“We have seen some contraction of unsecured loans in their balances, which we expect the next quarter to be stable,” he said.

International division profit nonetheless climbed to $ 486 million, boosted by a sharp drop in provisions, even as economic and political pressures in the region continued to dampen. Commercial loans fell 8% and personal loans and credit cards fell 11%, while residential mortgages slightly offset the decline with a gain of 6% from a year ago.

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“GDP forecasts in the Pacific Alliance countries tend to rise, and travel to the Caribbean is expected to pick up with vaccination rates,” CIBC analyst Paul Holden said in a note to clients . “We see the potential for higher consensus estimates as confidence in a more comprehensive recovery sets in.”

In the United States, BMO’s profit more than doubled to $ 553 million from a year earlier.

Particularly attention was drawn to the financial market divisions of banks as the frantic pace of transactions at the start of the year, which helped boost profits, slowed down over the summer months. The profit of the World Bank and Markets division of Scotiabank fell 14% from the same period last year.

But activity in the financial markets jumped at BMO. Net income jumped 31% to $ 558 million from a year ago, also supported by lower provisions, as well as a 4% increase in revenue from higher stock trading, news issuance of debt securities and higher subscription fees.

Wealth management boosted profits for both banks as clients rushed to grab high-end valuations and invest excess cash accumulated during the pandemic. Scotiabank’s Wealth Management division – bolstered by the acquisitions of Jarislowsky Fraser and MD Financial Management in recent years – reported profit of $ 390 million, an increase of 21% over the same period a year earlier. BMO’s Wealth Management division recorded an 18% increase in revenues over the previous year.

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