Bank of Montreal (BMO.TO) and Bank of Nova Scotia (BNS.TO), two of Canada’s largest banks, recently cautioned investors about subdued growth prospects in the domestic market until the central bank initiates a downward adjustment of the currently high-interest rates. These conditions have compelled financial institutions to set aside significant provisions for potential loan losses.
BMO reported lower-than-expected quarterly profits, citing larger-than-anticipated provisions for bad loans. In contrast, Scotiabank surpassed profit estimates, attributing its success to higher interest rates, which boosted earnings from loans. The market responded divergently to the news, with BMO’s shares dropping by 5.5% while Scotiabank’s rose by 2.7%.
Darryl White, CEO of BMO, outlined expectations of subdued economic growth in North America, particularly in the first half of the year, due to the prevailing high-interest rates. Economists anticipate that the Bank of Canada will delay interest rate cuts until at least June, following a series of rate hikes totaling 475 basis points since 2022. These rate hikes have impacted consumer sentiment and spending, particularly in a country where real estate purchases heavily rely on borrowing.
Despite the dampening effect of higher interest rates on credit demand, banks stand to benefit from increased interest income from lending activities. Scotiabank has seen positive outcomes from its international banking operations, especially in regions like Latin America and South America, where central banks have begun to ease monetary policy by reducing rates.
However, Scotiabank’s CEO, Scott Thomson, cautioned that the Canadian economy might lag behind its counterparts in the United States and Latin America. Nevertheless, the bank anticipates some growth rebound, supported by policy easing and more active residential real estate markets.
Both banks expect muted net interest margins for their Canadian banking segments due to the prevailing interest rate environment. Despite the potential pressure on consumers renewing mortgages, BMO believes that customers have the capacity to absorb higher payments.
In terms of financial performance, BMO reported adjusted earnings below analyst estimates, while Scotiabank’s earnings exceeded expectations. Scotiabank saw a 4.6% increase in net interest income, while BMO experienced a more significant 17% rise, attributed partly to the acquisition of Bank of the West.
Analysts highlighted concerns over provisions for credit losses, which significantly impacted both banks. BMO’s provisions nearly tripled, offsetting gains from higher net interest income, while Scotiabank’s reserves surged by approximately 51%.
Seeking growth opportunities beyond the saturated Canadian market, both banks have pursued expansion strategies. BMO made a substantial acquisition of U.S. regional lender Bank of the West, while Scotiabank focused on tapping into North America’s extensive trade network through Mexico.
However, external factors have also influenced financial performance. BMO incurred a special assessment fee from the U.S. Federal Deposit Insurance Corporation and recorded losses from the sale of its recreational vehicle loans portfolio. The FDIC levied this fee to replenish its deposit insurance fund following bank collapses in the United States.
Overall, while both banks faced challenges and reported earnings below expectations, they remain focused on navigating the evolving economic landscape and capitalizing on growth opportunities, both domestically and internationally.
