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Bank of Nova Scotia BNS-T and Bank of Montreal BMO-T reported rising first-quarter profits as the pace of lending to businesses and consumers picks up in Canada and abroad, driving stronger retail banking revenue.

Scotiabank’s earnings got a boost as the bank reported much lower provisions for credit losses, earmarking $222-million against potential losses if some loans default compared with $764-million in the same quarter a year earlier. And BMO’s profit surged as volatile markets generated unusually high trading revenue of $846-million on an adjusted basis from its capital markets arm, combined with robust investment banking income.

While investors view those factors as less reliable sources of earnings, trends in the banks’ core lending businesses showed signs of improving. Demand for mortgages was still strong, and businesses are borrowing more and consumer spending has picked up. Profit margins on loans that had been steadily shrinking now show signs of stabilizing and are expected to grow as central banks boost interest rates – with the Bank of Canada widely expected to move on Wednesday. And bankers expect that the economic rebound from the COVID-19 pandemic still has a good deal more room to run.

“I think we are in the relatively early stages,” Tayfun Tuzun, BMO’s chief financial officer, said in an interview. “I think there still is demand and that demand will be met with increases on the supply side, which should be a catalyst for further growth in both our commercial business as well as our retail business.”

Both banks beat analysts’ profit estimates by comfortable margins, continuing a string of better-than-expected results that started with Royal Bank of Canada last week, followed the next day by Canadian Imperial Bank of Commerce and National Bank.

But looking ahead, bankers are watching closely for fallout in global markets as Western governments imposed punishing economic sanctions on Russia over its invasion of Ukraine. BMO has no direct exposure to either country, so “we don’t necessarily have urgent fires to put out,” Mr. Tuzun said. But he is watching the impact on equities as bond markets rally, as well as the potential for central banks to slow the pace of anticipated interest rate hikes.

“There’s clearly consequences of putting an economy on hold and that also will potentially impact the thinking at the central banks,” he said. Rate hikes are likely to go ahead, but “maybe not as aggressively as the market had expected a month ago.”

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For the three months that ended Jan. 31, Scotiabank earned $2.74-billion or $2.14 a share, compared with $2.4-billion or $1.86 in the same quarter a year earlier. On an adjusted basis, Scotiabank said it earned $2.15 per share, beating analysts’ consensus estimate of $2.06, according to Refinitiv.

Scotiabank’s core Canadian retail banking profit rose 32 per cent year over year to $1.2-billion. Lower loan loss provisions were a significant factor, and revenue increased 9 per cent, while loan balances climbed 12 per cent, driven by mortgages and business loans.

The bank’s international profit also surged 51 per cent, helped again by lower provisions. Revenue increased by just 1 per cent year over year, but the unit’s lending portfolio showed signs that it is turning a corner after balances declined during the COVID-19 pandemic, with loans up 3 per cent from the previous quarter.

It was the second straight set of quarterly results that “solidified the notion that its international segment was no longer a drag” on Scotiabank’s performance, National Bank Financial Inc. analyst Gabriel Dechaine said in a note to clients.

Scotiabank CEO Brian Porter told analysts on Tuesday that he believes 2022 will be a year when “the full earnings power” of the bank will be on display, after the bank spent years buying and selling businesses to sharpen the focus of its operations abroad and make them less risky.

On Monday, Scotiabank took another step in that direction, paying $1.3-billion to acquire full control of its Chilean banking unit by buying out a remaining minority owner, adding to its position in a key foreign market.

In the first fiscal quarter, BMO earned $2.9-billion or $4.43 per share, compared with $2-billion or $3.03 in the same quarter last year. One-time gains from hedging strategies used to even out the accounting impact from the bank’s pending acquisition of California-based Bank of the West, as well as the sale of its European asset management business, boosted the bank’s quarterly profit.

Adjusted to exclude those items, BMO said it earned $2.6-billion or $3.89 a share, while analysts expected adjusted earnings per share of $3.26.

“BMO continues to deliver excellent financial results,” Mr. Dechaine said in a separate report.

Profit from BMO’s Canadian retail banking division rose by 34 per cent to $1-billion as revenue increased 15 per cent, and U.S. retail banking profit increased 18 per cent to $681-million. Commercial lending – which is BMO’s traditional strong suit – was front and centre as loan balances increased 10 per cent in Canada and 9 per cent in the U.S.

Nearly half of that growth came from new clients, according to CEO Darryl White, and a quarter of those new arrivals are in markets where BMO is expanding outside its core Midwestern base, such as Texas and Florida.

Among existing clients, however, supply chain problems are still hampering the use of existing credit lines extended to some clients. One example is in financing for auto dealers, where inventories of cars and trucks are still smaller because of chip shortages and supply chain delays. “The utilizations on those lines still have room to recover,” Mr. Tuzun said.

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