The stock market reaction to the latest batch of Canadian bank earnings suggests solid profits aren't enough to excite investors any more, a sign that lenders must now demonstrate they can deliver sizable growth to extend their rallies.
Bank of Nova Scotia and Bank of Montreal reported third-quarter profits that either matched or surpassed analyst expectations, respectively, but Scotiabank's shares fell 2.4 per cent on the TSX and BMO's barely budged.
The lenders benefited from strong revenue in their capital markets divisions and an ongoing rally in their wealth management arms. However, Scotiabank's domestic personal and commercial banking growth was muted relative to recent quarters, and both banks' retail businesses beyond Canada's borders have yet to show long-term growth.
BMO's profit totalled $1.13-billion, only a 1-per-cent rise over the prior year. Scotiabank benefited from a gain on the sale of a CI Financial Corp. stake, but excluding that one-time item, its core profit totalled $1.8-billion, on par with its record quarterly earnings three months ago.
On some level, there is little reason for the banks to worry. BMO's shares, for instance, have already climbed 16 per cent in 2014, so there may simply be market fatigue. However, investors could quickly fall out of love with the Big Six Canadian banks if there are budding concerns about the growth prospects.
To help drive expansion, the heads of BMO and Scotiabank have opted for two different strategies. BMO's Bill Downe is keen on redeploying profits back into his existing businesses, in order to generate organic growth. Scotiabank's Brian Porter is keen on striking acquisitions – especially in Latin America.
BMO has already been busy on the takeover front, buying Marshall and Ilsley for $4.1-billion (U.S.) in the U.S. Midwest in 2010 and acquiring Britain's F&C Asset Management for $1.3-billion (Canadian) earlier in 2014. "I think we've got to make some very significant gains in the businesses that we've acquired," before looking for new deals, Mr. Downe said in an interview Tuesday.
Mr. Porter, meanwhile, said on a conference call with analysts that "we continue to be opportunistic and look for acquisitions within our footprint and that are on strategy" – such as Latin American deals in wealth management and personal and commercial banking.
Boosted by the sale of a large stake in CI Financial Corp., Scotiabank booked a $2.35-billion profit in the third quarter. Stripping out the one-time item, the lender made $1.8-billion, or $1.41 per share, in line with analyst estimates. Scotiabank increased its quarterly dividend by 2 cents per share to 66 cents.
BMO made $1.13-billion, or $1.67 per share. After adjusting for one-time items, the bank made $1.73 per share, beating analyst estimates by seven cents.
Both banks saw capital markets revenues surge. Scotiabank had a record quarter in investment banking and also reported strong results in equity trading. BMO's rise stemmed from strong underwriting and advisory fees.
In Canada, Scotiabank's retail and business banking profit amounted to $565-million, up 3 per cent over the year prior, aided by a rise in the bank's net interest margin, which tracks the amount of money made per loan. However, Scotiabank's profit has hovered around this mark for three quarters, raising questions about the growth profile.
Outside of Canada, Scotiabank's Latin American operations are performing relatively well, but its Asian and Caribbean units are holding the bank back. At BMO, the U.S. personal and commercial bank brought in $147-million, up only 2 per cent from the year prior. Although commercial and industrial loan growth within this segment continues to boom, the division has yet to deliver the big turnaround that investors have long waited for.