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A woman leaves a Scotiabank branch, in Ottawa, on May 31, 2016.Chris Wattie/Reuters

Third-quarter profits surged at Bank of Nova Scotia and Bank of Montreal as a glut of savings consumers and businesses have accumulated in the COVID-19 pandemic helped drive down losses on loans, but extra cash in deposit accounts also kept a lid on new client borrowing.

Both banks showed improved results from retail banking in Canada, as consumers spent more, businesses gradually increased their borrowing and hot housing markets fuelled high demand for mortgages. For the third quarter ended July 31, mortgage balances climbed 10 per cent year-over-year at Scotiabank, and 12 per cent at BMO.

Once again, each bank’s quarterly profits were also boosted by receding concerns that the pandemic could cause a spike in loan defaults. Scotiabank and BMO reclaimed hundreds of millions of dollars from multibillion-dollar reserves they set aside early in the pandemic to guard against anticipated losses, most of which haven’t happened.

The greatest challenge for Canada’s major banks, however, is to get loan books growing faster. Commercial loan balances at BMO increased just 2 per cent in Canada in the quarter, and declined 1 per cent in the U.S., as some government-backed loans issued early in the pandemic expired. Even as spending rebounds, credit card balances are still below prepandemic levels at both banks, so lenders are earning less interest income.

This is in large part because banks and their customers are sitting on record deposits. At Scotiabank, chequing account balances are up 53 per cent from prepandemic levels in Canada and 20 per cent internationally, while an increasing proportion of new loans are secured – such as mortgages that carry low interest rates.

“We’re just responding to customer requests,” said Raj Viswanathan, Scotiabank’s chief financial officer, on a conference call with reporters on Tuesday. The change in customer behaviour shaped by excess savings “will be there for some time.”

Before demand for new loans can pick up, consumers and businesses need to spend more of the extra cash they have in deposits. That spending is expected to rise as pandemic restrictions on travel, entertainment and shopping have started to ease.

“We all have been expecting this: First dip into your liquidity and then start utilizing your loans, so if that’s the sequence that’s going to happen from now, that is an encouraging sign,” said Tayfun Tuzun, BMO’s chief financial officer, in an interview. “Collectively, it appears that things are picking up.”

A fourth wave of COVID-19 cases driven by the highly contagious Delta variant has added renewed uncertainty to the economic outlook. But Scotiabank’s economic models, as well as conversations with corporate customers, regulators and government officials, suggest “it’s not going to have a significant impact,” Mr. Viswanathan said. “The view is, we’ve learned from this. At this time, they’re not thinking of drastic shutdown measures.”

In the quarter ended July 31, Scotiabank earned $2.54-billion, or $1.99 per share, compared with $1.3-billion, or $1.04 a share, in the same quarter a year ago. Adjusted to exclude certain items, Scotiabank said it earned $2.01 per share. On average, analysts expected adjusted earnings of $1.90 a share, according to Refinitiv.

In the same quarter, BMO earned $2.28-billion, or $3.41 per share, compared with $1.23-billion, or $1.81 a share, a year earlier. On an adjusted basis, BMO earned $3.44 per share, far higher than analysts’ consensus estimate of $2.94 a share.

Analysts agreed BMO’s quarterly results were strong, but gave Scotiabank’s third-quarter earnings a lukewarm reception, as revenue fell 8 per cent in its international banking division – a key source of growth that operates mostly in Latin America and the Caribbean. The bank “delivered a mostly positive quarter, though one that maintains questions around the recovery trajectory of its international segment,” wrote Gabriel Dechaine, an analyst at National Bank Financial Inc., in a note to clients.

BMO’s share price rose 1.7 per cent in trading on the Toronto Stock Exchange on Tuesday, while Scotiabank’s share price dipped 0.8 per cent.

Resurgent consumer spending has been a bright spot for banks, after slowing down sharply early in the pandemic. Spending on BMO credit cards is 8 per cent higher than it was in the third quarter of 2019. At Scotiabank, fees from card transactions have bounced back faster than executives expected. “The spending has started,” Mr. Viswanathan said.

Balances customers carry on credit cards, which generate interest for the bank, are still comparatively low, however. “We don’t expect that to resume quite as fast,” Scotiabank’s head of Canadian banking, Dan Rees, said on a conference call.

As consumers have paid down debt – led by borrowers with lower credit scores than average and higher debt – impaired loans have plunged to unusually low levels.

Scotiabank’s loan loss provisions declined to $380-million in the third quarter, from 2.2-billion a year earlier, as the bank recovered $461-million that was previously earmarked to cover possible losses. BMO reported a net recovery of $70-million in provisions in the third quarter, after it set aside nearly $2.2-billion in provisions over two quarters of fiscal 2020.

Banks expect to release more loan loss provisions in the coming quarters, barring an economic setback. Eventually, impaired loans and defaults are expected “to normalize from the very low levels of this quarter,” said Pat Cronin, BMO’s chief risk officer, on a conference call. “However, given the strength of current conditions, we may see the next quarter or two with impaired losses below that level.”

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