Bank of Nova Scotia and Bank of Montreal are doing brisk business lending in international markets, helping drive third-quarter profits higher despite worries about potential upheavals in international trade.
The lenders each posted double-digit percentage gains in profit from international operations during the three months that ended July 31 – excluding some one-time costs – partly because of robust growth in loans to businesses, as well as lower foreign tax rates.
Banking outside Canada continues to be strategically vital to Canada’s largest financial institutions, which are keen to tap foreign markets that can provide faster profit growth than the saturated Canadian banking industry. The booming third-quarter returns from abroad for Scotiabank and BMO come as trade tensions appear to be on the cusp of easing. The United States and Mexico reached a bilateral agreement on Monday to resolve key sticking points in negotiations to revamp the North American free-trade agreement. Yet the talks are still mired in uncertainty as Canada rushes back to the negotiating table to address remaining stumbling blocks and try to salvage a trilateral deal.
“I think [Monday’s agreement] was certainly a solid step in the right direction,” said Brian Porter, Scotiabank’s chief executive officer, on a conference call with reporters. “This alleviates a bit of ambiguity in the market’s mind. And we look forward to the next piece of NAFTA being solved, hopefully in a number of weeks, and that’s with Canada’s inclusion."
Third-quarter profit from Scotiabank’s international businesses, which are concentrated in Latin America, was hampered by costs associated with a string of acquisitions the bank has announced over the past year, and fell 15 per cent year over year to $519-million. Excluding those costs, however, Scotiabank’s international profit rose 15 per cent, helped by strong results from Mexico, where a growing economy has boosted demand for the bank’s products.
Of four major banks that have reported results so far, including Royal Bank of Canada and Canadian Imperial Bank of Commerce last week, Scotiabank was the first to miss analysts' expectations for quarterly earnings a share, falling short by one cent.
Scotiabank has been bulking up in its four key international markets: Mexico, Peru, Chile and Colombia. The bank bought a controlling stake in Chilean bank BBVA Chile for $2.9-billion, and made smaller acquisitions in Peru and Colombia, which have growth potential thanks to younger populations and a rising middle class. In the third quarter, international loan balances rose 10 per cent, and 14 per cent in the bank’s core Latin American markets.
“I think that the market has been hyper-focused on the U.S., which is fine, but sometimes they forget what’s going on in other parts of the world,” Mr. Porter said.
At the same time, BMO’s U.S. footprint delivered another impressive quarter, with U.S. profit rising 36 per cent compared with the same quarter a year ago. Benefits from U.S. tax cuts contributed 14 per cent of the unit’s earnings growth, and projected loan losses eased. But BMO also increased its commercial loan balances by 13 per cent at a time when most of its American peers have seen their respective growth in that category flatten.
“It’s [approximately] double the growth rate of our competitors in the U.S.” in commercial loans, said Tom Flynn, BMO’s chief financial officer, in an interview. “In the last year, we focused on expanding the number of industries that we specialize in, and that’s given us new markets to grow into. And we’ve also opened up some new offices in other parts of of the U.S.”
Over all, Scotiabank earned $1.9-billion, or $1.55 a share, in the third quarter, compared with $2.1-billion, or $1.66 a share a year ago.
The bank also absorbed $453-million in pretax costs – $320-million after tax – relating to a series of six deals totalling $7-billion that it has struck since last fall, some of which have yet to close. Adjusting to exclude one-time deal costs, Scotiabank earned $1.76 a share, just shy of the $1.77 consensus among analyst polled by Bloomberg LP.
Scotiabank also increased its quarterly dividend by three cents, to 85 cents a share. But its share price still fell 1.8 per cent to $76.89 on the Toronto Stock Exchange on Tuesday.
“We viewed [Scotiabank’s] performance as tepid,” National Bank Financial Inc. analyst Gabriel Dechaine said. “The big-picture perspective, though, revolves around the bank’s active M&A year.”
By contrast, BMO’s profit surged 11 per cent to $1.5-billion, or $2.31 a share, compared with $1.4-billion, or $2.05 a share, in the third quarter last year.
Adjusted for special items, BMO said it earned $2.36 a share, whereas analysts expected $2.26 a share, according to Bloomberg, and BMO’s share price inched 0.2 per cent higher.
Even amid a slowing mortgage market, profit from both banks' core Canadian banking operations continued on a path of steady growth over the past year, up 8 per cent to $1.1-billion at Scotiabank, and rising 5 per cent to $642-million at BMO.
And both lenders made strides in controlling costs, which is a high priority as they increase spending on digital initiatives. Scotiabank improved its efficiency ratio – which measures expenses as a percentage of revenue – to 52.5 per cent, from 53.3 per cent a year ago. And BMO, which has lagged its peers in this category, shaved its efficiency ratio to 61 per cent, from 63.1 per cent last year, with help from a $260-million restructuring charge recorded last quarter.