International banking expansion helps BMO and Scotiabank push through volatile first quarter

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Robust expansion in international banking helped two of Canada’s largest banks battle through volatility in financial markets in the first fiscal quarter, offsetting difficult conditions for capital markets and wealth management.

In a challenging quarter, Bank of Nova Scotia posted a 17-per-cent rise in profit from international banking, compared with a year earlier. But a 4-per-cent decline in overall year-over-year profit still disappointed investors as the bank grapples with higher expenses while juggling a string of recent acquisitions and divestitures across a number of countries.

By contrast, Bank of Montreal impressed Bay Street, boosting adjusted profit for the quarter that ended Jan. 31 by 8 per cent. The results were driven by a 43-per-cent jump in profit from its U.S. personal and commercial banking division, helped by U.S. tax reform as well as rapid growth in commercial banking.

Scotiabank and BMO are the second and third banks to report first-quarter earnings, following Royal Bank of Canada, which reported stronger earnings growth last Friday despite weakness in some businesses. All three banks have made more cautious assumptions about potential loan losses, accounting for a more uncertain domestic economic forecast. But the outlook for the rest of 2019 still looks positive for the banks, even if it’s more muted than it was a year ago.

“With the more dovish tone coming out of central banks on a global basis, markets have settled down, and we’re in kind of an equilibrium state with people expecting somewhat lower economic growth, but against that a lesser prospect of higher interest rates,” Tom Flynn, BMO’s chief financial officer, said in an interview.

On Tuesday, BMO’s share price rose 2.1 per cent to $101.66 at midday on the Toronto Stock Exchange, while Scotiabank’s shares lost nearly 2.8 per cent in value, falling to $73.17.

Scotiabank has undertaken major changes over the past year, spending more than $7-billion on acquisitions to bolster its businesses in Chile and in wealth management, while selling a number of international operations in the Caribbean and El Salvador. The bank has also entered a non-binding memorandum of understanding to significantly reduce its stake in Thailand-based Thanachart Bank Public Company Limited, or TBank, which is pursuing a merger with TMB Bank Public Company Limited (TMB).

Scotiabank has been looking to sell its Thanachart stake for some time and, if the deal is approved, Scotiabank would give up much of the $250-million in annual profit it currently generates, but would also boost its common equity Tier 1 (CET1) capital ratio by one quarter of a percentage point.

"The pace of change will slow," said Brian Porter, Scotiabank's chief executive officer, on a conference call with analysts. "We've dealt with our geographic footprint."

The changing face of Scotiabank’s business has come at a short-term cost, however, as acquisition costs and other one-time items accounted for the lion’s share of a 19-per-cent rise in expenses. The bank is also investing heavily in technology and defences against cybercrime and money laundering.

Profit in the core Canadian banking unit fell 3 per cent in the first quarter despite rising revenue and growing loan portfolios. And profit from capital markets was hit hard, falling 26 per cent from the same period a year ago, partly because of lower trading revenues.

Scotiabank reported profit of $2.25-billion, or $1.71 a share, compared with $2.34-billion, or $1.86, a year ago.

Adjusted to exclude certain items, including acquisition costs, Scotiabank said it earned $1.75 per share, well shy of analysts’ consensus expectation of $1.82 a share.

The bank also raised its dividend by 2 cents to 87 cents a share.

Mortgage lending increased slowly but steadily at both banks, compared with a year earlier – by 3 per cent at Scotiabank and the same rate at BMO’s in-house channels – as Canadian housing markets continue to adjust to stricter rules on some borrowers.

“It does look like we’ve had the soft landing that people have hoped for," Mr. Flynn said. “And from our perspective, the market tone feels good, feels solid.”

At BMO, profit from Canadian retail banking was essentially flat at $647-million, despite a 14-per-cent increase in commercial lending. Its capital markets arm fared better than its peers, with profit down only 6 per cent in a difficult market, thanks to higher investment and corporate banking revenue. But wealth-management profits fell 10 per cent.

BMO reported profit of $1.51-billion, or $2.28 a share, compared with $973-million, or $1.43, a year earlier. In the same period last year, BMO’s results were dragged down by a one-time, non-cash charge of $425-million related to U.S. tax reform. Excluding that charge and certain other items, BMO said profit of $1.54-billion was up 8 per cent, and the bank earned $2.32 a share ahead of the consensus expectations of $2.25 per share.