Lively capital markets pushed first-quarter profits higher at Bank of Nova Scotia and Bank of Montreal, despite uncharacteristic weakness in both banks’ international divisions.
Scotiabank’s results were complicated by costs and accounting gains related to a series of acquisitions and sales of businesses, as well as multiple one-time items the bank had already announced prior to the quarter. Profit edged 3.5 per cent higher at the country’s third-largest bank, despite lost revenue from businesses the bank has sold.
Divested businesses were the main reason that Scotiabank’s international arm, which is concentrated in Mexico, Peru, Chile and Colombia, suffered a 28-per-cent drop in profit, to $518-million – or a decrease of 17 per cent after adjusting for special items. That snapped a streak of 18 straight quarters of rising profit from the division, which has undergone a dramatic transformation under chief executive officer Brian Porter.
The bank has also been contending with unrest in Chile, political uncertainty in Peru and slow economic growth in Mexico, but the outlook for the region appears to be improving.
“As we continue to see improvement in the outlook for both Mexico and Chile, we expect international banking to have stronger results for the balance of the year,” Mr. Porter said on a conference call.
For the fiscal first quarter, which ended Jan. 31, Scotiabank reported profit of $2.33-billion, or $1.84 a share, compared with $2.25-billion, or $1.71 a share a year ago.
After adjusting to exclude one-time items, Scotiabank said it earned $1.83 a share. Analysts expected adjusted earnings per share of $1.74, according to data firm Refinitiv.
Profit from Scotiabank’s global banking and markets division rose 11 per cent to $372-million, and was up 35 per cent year over year excluding one-time items.
BMO’s capital markets arm boosted profit by 39 per cent to $356-million. Last week, Royal Bank of Canada reported even stronger capital markets profits, as banks benefit from good trading conditions and a favourable comparison to a tough first quarter last year.
However, loans gone sour were a drag on both companies’ results in the quarter. Scotiabank set aside an extra $155-million to cover anticipated losses after making the models it uses to predict bad loans more pessimistic, and BMO’s expected losses spiked $212-million higher, mostly due to lending to the transportation and oil and gas sectors.
BMO’s provisions for credit losses – the money banks set aside to cover loans gone bad – reached $349-million, after dipping to unusually low levels last year, including one larger provision on a loan to a long-time client in the construction industry. But Pat Cronin, the bank’s chief risk officer, told analysts the rise in losses is “an anomaly.”
“We do expect the loss rate to step down" in the coming quarters, chief financial officer Tom Flynn said in an interview.
Executives from both banks said it is still too soon to gauge the potential impact from the coronavirus outbreak or from rail blockades by protesters opposing the Coastal GasLink natural gas pipeline.
BMO earned $1.59-billion, or $2.37 per share, compared with $1.51-billion, or $2.28 a share, a year earlier.
After adjusting to exclude certain items, BMO said it earned $2.41 a share, ahead of the $2.37 a share analysts expected.
BMO’s core Canadian retail banking division posted strong results, with profit up 8 per cent to $700-million, thanks in part to a 15-per-cent bump in domestic commercial lending. BMO has been piling on new commercial loans, grabbing market share from its peers in Canada and the U.S.
Yet as BMO expands outside its historic stronghold in the U.S. Midwest, analysts are concerned that the bank may be taking new risks to bulk up in commercial lending, which increased by 13 per cent in the U.S. during the quarter. David Casper, the bank’s U.S. CEO, said that most new loans are in familiar sectors, and many of them are secured by assets.
“I feel really good about the growth and would never apologize for it," Mr. Casper said. “You’re right to be skeptical. We’re going to prove you wrong."
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