Scotiabank barely beat analysts’ expectations as it reported a lower fiscal third-quarter profit of $1.91-billion.Andrew Lahodynskyj/The Canadian Press
Bank of Montreal BMO-T and Bank of Nova Scotia BNS-T each reported third-quarter profits on Tuesday that were stymied by higher provisions for loan losses, but investors had sharply different reactions to the two banks’ results.
BMO’s share price fell more than 7 per cent during the day’s trading before closing at $112.04, a 6.5-per-cent decline from Monday’s close. BMO reported higher quarterly profit of $1.86-billion, but that still missed analysts’ estimates, as the bank’s provisions for credit losses came in about 20 per cent higher than anticipated and are likely to keep rising.
By contrast, Scotiabank reported a lower fiscal third-quarter profit of $1.91-billion that barely beat analysts’ expectations. The bank’s provisions for credit losses also increased, but to expected levels, and look to be near their high-water mark. Scotiabank’s share price gained 2.5 per cent to close at $67.22.
A breakdown of the big Canadian banks’ third-quarter earnings
The thorn in BMO’s earnings was the $906-million the bank set aside to cover possible losses on defaulting loans – up from $492-million a year earlier. On a Tuesday conference call to discuss the bank’s earnings, chief executive officer Darryl White said a combination of prolonged high interest rates, economic uncertainty and changing consumer preferences “had an acute impact” on loan impairments.
BMO expects its provisions for credit losses to climb higher for the next quarter or two, before easing back toward their long-term average in 2025. Mr. White said the drivers of BMO’s increasing credit loss ratio are some unpredictable losses on loans made during the COVID-19 pandemic, combined with BMO’s heavier lending exposure to struggling commercial and corporate customers.
“There is a business mix at BMO that leads to this for short periods of time, sometimes, and we’re in one of those periods right now,” he said. “It’s as simple as that.”
Analysts seemed unconvinced, as it was BMO’s third consecutive earnings miss. “Clearly, something’s gone wrong,” TD Securities analyst Mario Mendonca said on the bank’s conference call.
Scotiabank pays $2.8-billion for minority stake in U.S. regional bank KeyCorp
Jeffries Securities analyst John Aiken downgraded his rating on BMO’s stock.
“We freely admit that we may be closing the barn door after the animals have escaped,” Mr. Aiken wrote in a note to clients. “The pace of deterioration in credit and BMO’s relative overexposure to commercial [loans] infer ongoing pressure to the bank’s earnings.”
Mr. Aiken said he remains positive for the longer term on BMO’s American operations, but the chance of the bank outperforming in the near term “has become increasingly difficult.”
National Bank Financial Inc. analyst Gabriel Dechaine kept an “outperform” rating on BMO’s stock, but said “a decline in investor trust levels” because of BMO’s credit metrics will weigh on the stock.
Scotiabank’s provisions for credit losses also jumped higher, to $1.05-billion, compared with $819-million in the third quarter last year. But that was in line with analysts’ expectations, although at the high end of the bank’s guidance for the year.
The bank’s provisions for impaired loans increased 31 per cent to $970-million, as more borrowers fell behind on payments – especially in key Latin American markets for Scotiabank such as Colombia, Chile and Peru. More Canadian banking clients also fell behind on car loans and credit card balances.
The outlook for Scotiabank’s provisions is relatively steady, however. The bank said its ratio of provisions to total loans, which was 55 basis points, or 0.55 per cent, is likely to be similar next quarter. And the bank’s comparatively low level of provisions versus the value of loans that are still being repaid signals that the bank expects potential losses from defaults are nearing a peak.
“I continue to be impressed by how resilient the Canadian consumer has been through this period,” said Phil Thomas, Scotiabank’s chief risk officer.
On Tuesday, Scotiabank chief executive officer Scott Thomson also defended the bank’s US$2.8-billion deal to buy a minority stake in U.S. regional bank KeyCorp, which surprised investors and drew skeptical responses from analysts when it was announced earlier this month.
Mr. Thomson framed the deal as financially advantageous for Scotiabank’s shareholders, and part of a plan to boost its exposure to the U.S. banking market. Until now, Scotiabank has had a smaller U.S. footprint than most rival Canadian banks, and it has focused instead on Latin American and other international markets.
“It’s a low-cost, low-risk way to get into the U.S. market, in a market that’s very uncertain right now, both from a political, regulatory and economic perspective,” Mr. Thomson said Tuesday. Scotiabank has agreed to keep its KeyCorp stake below 20 per cent over a five-year period. The investment “allows us to dip our toe in the water, learn about the market” while increasing profits and offering more options for U.S. expansion over time, Mr. Thomson said.
Last year, BMO launched a major expansion of its U.S. business with its US$16.3-billion acquisition of San Francisco-based Bank of the West, adding nearly 1.8 million customers and more than 500 branches. Profit from the bank’s U.S. personal and commercial banking division was down 9 per cent in the third quarter, with lower revenue and sharply higher provisions for credit losses.
BMO’s executives were eager to dispel any notion that the weaker results were a result of issues in Bank of the West’s loan book.
“We haven’t seen any different loss performance from the Bank of the West,” said chief risk officer Piyush Agrawal. “These are episodic events or credits that are driving some of these issues.”
BMO’s profit rose to $2.48 a share. On an adjusted basis, the bank earned $2.64 a share, which fell short of analysts’ consensus estimate of $2.76 a share.
Third-quarter profit at Scotiabank amounted to $1.41 a share, down from $2.19-billion, or $1.70 a share, in the same quarter last year. The bank’s adjusted profit of $1.63 a share beat the analysts’ consensus estimate of $1.62.
Both banks kept their quarterly dividends unchanged, with Scotiabank’s at $1.06 a share and BMO’s at $1.55 a share.
Last week, Toronto-Dominion Bank TD-T reported its first quarterly loss in 21 years as it set aside US$2.6-billion to cover expected regulatory fines over failures in its anti-money-laundering systems. Royal Bank of Canada RY-T, National Bank of Canada NA-T and Canadian Imperial Bank of Commerce CM-T report fiscal third-quarter earnings later this week.
Editor’s note: A previous version of this article incorrectly the Bank of Nova Scotia's Q3 earnings for 2023 and 2024. This version has been updated.