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A pedestrian walks in Toronto's Financial District, on Feb. 11, 2021.

Fred Lum/The Globe and Mail

Bank of Montreal ’s second-quarter profit surged higher amid rising optimism about an economic recovery, but demand from clients for new loans has been slower to rebound as the pandemic drags on.

Abnormally low provisions for loan losses and bustling activity in capital markets helped push BMO’s adjusted profit to $2.1-billion, up 193 per cent year-over-year, excluding writedowns and costs from the recent sale of two businesses abroad.

BMO is the first major bank to report financial results for the fiscal second quarter that ended April 30. Across the banking sector, earnings will compare favourably to the same quarter last year, when profits reached a nadir in the early months of the coronavirus pandemic, as lenders stockpiled billions of dollars in financial reserves to cover a potential wave of loan losses that has largely not materialized since then.

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BMO set a high standard, beating analysts’ expectations by a wide margin, and executives are optimistic about the bank’s near-term prospects. The North American economy is “poised for a strong recovery” this year and next year, chief executive officer Darryl White said in a conference call with analysts.

But even with business and consumer confidence improving, supply chain delays, public-health setbacks, sky-high deposit balances and inflation fears are still dampening demand for new loans, especially from businesses that form a core part of BMO’s clientele.

In the three months that ended April 30, BMO earned $1.3-billion, or $1.91 a share, compared with $689-million, or $1 a share, in the same quarter last year. That included $772-million in charges related to the sale of the bank’s European asset management arm and its private banking business in Hong Kong and Singapore earlier this year.

Excluding those charges, BMO said it earned $3.13 a share. On average, analysts expected adjusted earnings per share of $2.82, according to Refinitiv.

Fears that the pandemic would cause a spike in losses from defaulting loans are receding as massive government stimulus programs have cushioned the pandemic’s impact on many businesses and households. In the fiscal second quarter, BMO earmarked just $60-million in provisions for credit losses to cover loans that may go bad. That included $155-million for loans that are past due, offset by a recovery of $95-million that had previously been set aside against those that were still current, based on improving economic forecasts.

In the second quarter last year, BMO set aside $1.12-billion in provisions to build its resilience against the crisis created by COVID-19, followed by another $1.1-billion in the next quarter. Investors now expect banks to start recovering some of that money as expectations of actual losses decline, which should boost profits in future quarters.

Chief risk officer Pat Cronin said he is watching to see how soon governments in Canada ease lockdown restrictions, what the fallout will be from a health crisis in India, and for signs that hot housing markets are stabilizing. The bank’s allowance for loan losses “will take some time to go back down,” he said in the analyst call. “My gut is, probably, over the course of the next 12 to 18 months we’ll see a reduction to something that is more stable.”

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It may also take time for BMO to restore its normal pace of lending. The bank’s loan balances, at $459-billion, were stable when compared with the first quarter, and commercial and personal loans increased by 2 per cent, but total balances are still down 4 per cent from a year ago.

“Commercial loan growth was stagnant and cards balances continued to contract,” said Meny Grauman, an analyst at Scotia Capital Inc., in a note to clients. It “remains an open question ... when we will see a revival in non-mortgage lending.”

Optimism among business clients is rising and demand for their products is strong, but many of them haven’t started borrowing again. Businesses from car dealers to appliance stores have too little inventory to meet demand from consumers as supply chains have become clogged, causing product delays and increasing prices.

“Until that challenge sorts itself out, our existing clients are unlikely to increase their use of bank [credit] lines,” Tayfun Tuzun, BMO’s chief financial officer, said in an interview.

For now, business lending will likely grow at a modest pace, but by the fiscal fourth quarter or early 2022, “we should start realizing a lot more visible loan growth,” he said.

Personal loans such as credit card balances and auto lending are still down 5 per cent year-over-year, but consumer spending, especially on travel, started to pick up last month in Canada and the United States. “That likely is going to continue,” Mr. Tuzun said, and as consumers burn through pent-up savings, “at one point that is going to start translating into more personal loan growth.”

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With Canadian housing markets roaring, mortgages continued to be an exception to otherwise sluggish loan growth, with BMO’s balances rising 6 per cent year-over-year. There should be “some moderation” after a tougher stress test on new mortgages takes effect June 1, Ernie Johannson, head of North American personal and business banking, said in the analyst call. But it is only expected to affect 5 per cent to 10 per cent of borrowers. “It will still remain a fairly robust mortgage market in Canada,” she said.

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