BMO and Scotiabank report slowing growth, credit provisions put pressure on earnings

A combination of pressures, including slowing economic growth and rising costs, weighed on Canadian banks as they began to report second quarter results Wednesday.

Both BMO Financial Group and Bank of Nova Scotia reported higher expenses, more money set aside for bad loans, and thinner margins on interest — factors that led both banks to earn less than they did a year ago and fall short of analysts’ expectations.

BMO chief executive Darryl White characterized it as a “shifting environment” that is putting pressure on revenue growth.

“The impact of persistent inflation, rising rates, a slowing global economy and an increasing deposit competition on the industry has accelerated. We’re not immune to these market forces,” he said on an analyst call.

His comments came as the bank reported a profit of $1.06 billion, down by 78% from a profit of $4.76 billion a year ago, due in part to adjustments related to its deal to buy Bank of the West. Revenue for the quarter totalled $8.44 billion, down from $9.32 billion last year.

Scotiabank chief executive Scott Thomson said the quarter was marked by “challenging market conditions” as the bank reported net income of $2.16 billion, down by 21% from a year earlier. Scotiabank’s revenue totalled $7.93 billion, down from $7.94 billion in the same quarter last year.

The results came after a quarter marked by turmoil in the U.S. banking system as several major banks, starting with Silicon Valley Bank, became unstable enough for regulators to force a sale.

The banking crisis was created in part by rapidly rising interest rates that put pressure on households carrying mortgages, and on the profit margins on bank interest as consumers seek out better rates on deposits.

“The recent market turmoil in the U.S. has added an element of financial uncertainty,” said Scotiabank chief risk officer Phil Thomas on a conference call with investors.

The bank said its Canadian mortgage portfolio remains solid, despite higher rates as customers pull back on other spending.

“Our customers are managing through this period of heightened interest rates by making trade-offs. For example, discretionary spending such as retail spending and entertainment is down by 10% year-over-year for our variable rate customers.”

He said delinquency rates on loans are trending up modestly and that the bank expects provisions for bad loans to stay elevated for the year. He added that he’s comfortable with how the bank is positioned for the economic cycles ahead.

BMO, which closed its US$16.3-billion Bank of the West deal in the quarter, said the failure of some U.S. banks added market volatility to the quarter.

“As we look ahead, we are cautious about the economic environment,” BMO chief risk officer Piyush Agrawal said.

BMO provision for credit losses amounted to $1.02 billion in the quarter, up from $50 million a year earlier.

Scotiabank’s provisions totalled $709 million, up from $219 million a year ago.

Inflation also impacted results, as BMO reported quarterly expenses up by 50%  from last year, with costs associated with the Bank of the West acquisition making up the bulk of the jump. Scotiabank reported expenses were up by 10 per cent in the quarter from a year earlier.

BMO’s adjusted earnings per diluted share came in at $2.93, down from $3.23 last year and below analyst expectations of $3.19 per share, according to estimates compiled by financial markets data firm Refinitiv.

Scotiabank says it earned an adjusted $1.70 per diluted share in its latest quarter, down from $2.18 in the same quarter last year, and below the average analyst expectation for $1.78 per share according Refinitiv.