Canada's BMO misses profit estimates as rainy day funds nearly triple; Scotiabank beats

FILE PHOTO: A woman leaves a Scotiabank branch in Ottawa, Ontario, Canada, May 31, 2016. REUTERS/Chris Wattie/File Photo

By Nivedita Balu and Niket Nishant

(Reuters) -Canada’s Bank of Montreal (BMO) on Tuesday missed analysts’ estimates for quarterly profit as the lender set aside a larger-than-expected sum of money to cover bad loans in an uncertain economy.

FILE PHOTO: A sign for the Bank of Montreal in Toronto, Ontario, Canada December 13, 2021. REUTERS/Carlos Osorio/File Photo

Meanwhile, peer Bank of Nova Scotia (Scotiabank) reported a better-than-expected profit as it benefited from higher interest rates that helped it earn more on loans.

In Canada, where big banks dominate the market in lending and personal banking, households have borrowed heavily to buy real estate but face challenges in repaying loans amid higher costs of living.

While higher interest rates have slowed demand for credit, they help bring in more money for banks through their lending activities.

BMO reported adjusted earnings of C$2.56 per share, compared with analysts’ estimate of C$3.02, according to LSEG data. Scotiabank’s earnings of C$1.69 beat estimates by 8 Canadian cents.

Scotiabank said net interest income (NII), the difference between the interest banks earn on loans and pay out on deposits, rose 4.6%, while at BMO it rose 17%, benefiting from the acquisition of Bank of the West.

Jefferies analyst John Aiken said Scotiabank saw “solid performance on its cost controls” but noted that both its Canada and International units saw declines in their loan portfolios while impaired loans grew.

At BMO, provisions for credit losses (PCLs) grew nearly three-fold, offsetting gains from higher NII. Scotiabank’s reserves surged about 51%.

BMO’s market-sensitive businesses also took a hit, with net income from its capital markets unit dropping 17% due to weaker trading.

BMO CEO Darryl White said the environment “has constrained revenue growth in market-sensitive businesses in the near term,” but the bank was reducing expenses and “optimizing” its balance sheet.

CHALLENGES ABROAD

Major banks are heavily dependent on the home market – where they offer credit cards, mortgages, personal loans and take deposits – which account for more than 40% of their total income.

The banks more recently are looking for growth outside of Canada, with BMO making a $16 billion purchase of U.S. regional lender Bank of the West and Scotiabank targeting North America’s $1.6 trillion trade through Mexico.

Scotiabank said loans at its international markets, which includes parts of Latin America and the Caribbean, were down 2% while expenses grew 4%.

But analysts noted that Scotiabank’s international banking unit benefited from improved loan margins and higher deposit margins due to central bank cuts in Chile and Peru.

BMO said it was also impacted by a C$313 million special assessment fee by the U.S. Federal Deposit Insurance Corporation and C$136 million in losses from the sale of its recreational vehicle loans portfolio.

Adjusted earnings from its U.S business fell 4%

($1 = 1.3507 Canadian dollars)

(Reporting by Niket Nishant and Pritam Biswas in Bengaluru and Nivedita Balu in Toronto; Editing by Shinjini Ganguli and Mark Porter)