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Bank of Nova Scotia BNS-T and Bank of Montreal BMO-T expect loan loss reserves to continue to climb as consumers reel under the strain of tougher economic conditions, with relief on the horizon if central banks cut interest rates later this year.

Two of Canada’s largest banks reported first-quarter earnings Tuesday, booking higher-than-expected provisions for credit losses – funds the banks set aside to cover loans that may default. As consumers and businesses grapple with higher interest rates and inflation, the risk of loan losses has risen across the banks, prompting the lenders to hike provisions, which crimp profit growth.

“Although the Canadian economy has shown more resilience in response to the significant monetary policy tightening over the past two years, interest rates are having the desired impact on consumer sentiment and spending which should allow for rate cuts later this year,” Scotiabank chief executive Scott Thomson said during a conference call. “This quarter’s results reflect an increase in credit provisioning given the incremental financial strain that sustained higher interest rates are having on our clients.”

In the quarter, Scotiabank set aside $962-million in provisions and BMO reserved $627-million – more than the banks booked in the same quarter last year and higher than analysts had expected. The bulk of those provisions were put toward impaired loans, or debt that a bank believes will not be repaid.

Scotiabank’s impaired loan provisions were driven by higher reserves for personal loans, credit cards, auto lending and mortgages as consumers grapple with tougher economic conditions. At BMO, consumer loan losses in both Canada and the United States were bolstered by higher delinquencies in credit cards and other personal loans as an increase in customer insolvencies in Canada rose above prepandemic levels.

Both banks expect growth in Canada to diverge from that of their two largest global growth markets, with BMO in the U.S. and Scotiabank in Latin America. Mr. Thomson said Mexico is likely to show the strongest growth across its market while Canada’s economy is likely to underperform the U.S.

In the U.S., where BMO recently bolstered its footprint by purchasing California-based Bank of the West, the lender anticipates a less significant economic slowdown than in Canada.

“The near-term growth outlook industrywide is muted by slowing GDP growth,” BMO chief executive Darryl White said during a conference call. “We expect North American economic growth to remain subdued in the first half of this year before recovering toward the end of the year on the back of lower interest rates. While directionally similar, we do expect a meaningful difference in the landing between Canadian and U.S. economies.”

Scotiabank and BMO were the first banks to unveil first-quarter financial results. Royal Bank of Canada and National Bank of Canada will release their results on Wednesday and Toronto-Dominion Bank and Canadian Imperial Bank of Commerce will close out the week on Thursday.

Adjusted to exclude certain items, Scotiabank earned $1.69 a share, beating the $1.61 analysts expected, according to Refinitiv.

BMO said it earned $2.56 a share, missing analyst estimates of $3.02 on an adjusted basis as capital markets profit slumped. Global markets revenue dropped on lower trading revenue, which was weighed down by the federal government’s proposal to eliminate the tax deductibility of certain Canadian dividends.

Both lenders are undergoing significant strategic changes. In December, Scotiabank launched a turnaround plan aimed at building its deposit base to reduce its funding costs and target businesses in Latin America and North America where it believes it can boost growth.

Last year, the bank eased up on mortgage lending to refocus on expanding its deposits by cross-selling products to its customers that held only loans with Scotiabank. It offers a package that bundles a mortgage, chequing account and other personal banking products, which accounted for 70 per cent of all mortgage deals done in the quarter.

In the first quarter, the number of clients with three or more banking products increased 50 basis points. (A basis point is one-hundredth of a percentage point.)

“On the retail side of the business, we remain overly reliant on the secured residential mortgage business, and we are too often a single product provider to the client,” Mr. Thomson said. “We are closely monitoring primacy as a percentage of overall relationships in each of international banking, retail, commercial and wholesale.”

In the fall, BMO completed its integration of Bank of the West, a takeover that catapulted the lender into California and extended its reach across states in the Midwest. The bank closed the deal in February, about one month before the failure of Silicon Valley Bank spurred a regional banking crisis.

The bank reached its target of $800-million in deal-related cost synergies – savings the bank expected to achieve by streamlining its operations and technology platforms with Bank of the West.

But BMO posted its fifth consecutive quarter of negative adjusted operating leverage – an industry term for expenses outpacing revenue – at 5.4 per cent. Chief financial officer Tayfun Tuzun said he expects to book positive operating leverage in the second quarter of this year as the bank continues to streamline costs and revenue grow on the back of an anticipated pick-up in capital markets activity.

“I expect – in the next one or two quarters – continued efficiencies on the expense side and, assuming that the environment remains positive, we should also see pick up in revenue,” Mr. Tuzun said in an interview.

BMO said that it has retained 90 per cent of Bank of the West’s clients since the integration in September.

“We closed, converted and integrated the Bank of the West acquisition during a period of heightened uncertainty in the U.S. banking market where several banks have been challenged to maintain liquidity capital and customers,” Mr. White said. “We’ve sustained this performance despite intensified deposit competition and decreased loan demand.”

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 12/06/24 4:00pm EDT.

SymbolName% changeLast
BNS-T
Bank of Nova Scotia
+1.96%64.97
TD-T
Toronto-Dominion Bank
+0.45%75.75
RY-T
Royal Bank of Canada
-0.04%144.83
CM-T
Canadian Imperial Bank of Commerce
+1.13%66.83
NA-T
National Bank of Canada
-5.89%109.49
BMO-T
Bank of Montreal
+1.45%116.56

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