Bank of Montreal reported a modest increase in profit for the second quarter on Wednesday. Nathan Denette / The Canadian Press
Top executives at two major Canadian banks predict they may continue to add new loans and boost profits in the coming quarters, offering an optimistic outlook for the financial sector that runs counter to economists’ increasingly gloomy predictions of an impending decline.
Bank of Nova Scotia BNS-T and Bank of Montreal BMO-T reported higher gains for the second quarter on Wednesday, supported by strong demand for personal and commercial loans, as well as lower loan loss reserves than analysts expected. Profits rose 12 percent from the same quarter a year earlier at Scotiabank and 4 percent after BMO adjustments as rising interest rates helped boost loan margins.
The slowdown in growth fears easing bullish sentiment
Canada is considering new measures to protect its economy from threats to national security
This marked a strong start to the big banks’ profit season, but analysts have warned that the results, which cover the three months ended April 30, now seem far away in the rearview mirror. They have pressured senior executives to prepare for the deteriorating economic environment marked by Ukraine’s war, high inflation, a rapid rise in central bank interest rates and a growing prospect of a recession that could curb customers’ appetite for borrowing.
The CEOs of banks and financial executives stressed that they still expect economies to grow as COVID-19 headwinds weaken. They noted that most households are in good financial health, as many have hidden additional savings during the pandemic, while unemployment remains low in a tight labor market. Businesses are borrowing to increase their inventories as demand for products outpaces supply and some sectors, such as raw materials, are booming.
“The macroeconomic background for our key geographical regions remains positive,” Scotiabank CEO Brian Porter said during a conference call with analysts on Wednesday. “Despite the macroeconomic and geopolitical uncertainties of recent months, we are encouraged by the sustainability of our business.
The mood among economists is much less unhappy as the threat of a global recession grows, although few predict it is very likely. The tone was also grim as business leaders and politicians rubbed their elbows at the World Economic Forum in Davos. And former Central Bank Governor Stephen Poloz recently predicted that the country is heading for a period of stagflation – a mixture of slow growth and high inflation.
However, the increase in bank loan balances is widespread, and BMO Chief Financial Officer Typhoon Tuzun said in an interview that he still expects “high single-digit loan growth” during the year – the same guidelines he gave three months ago.
“Overall, our clients tell us that they are still interested in investing in their business,” said Mr. Tuzun. He added that there are “very good indicators of what lies ahead” for the bank.
Particularly prominent is commercial lending in Canada, where loan balances rose 13% in BMO and 19% in Scotiabank in the second quarter. Scotiabank Chief Financial Officer Raj Visvantan said that corporate customers and consumers have “very strong” balance sheets at the moment, “so we are seeing a lot of accumulated demand.”
Mortgage balances rose 16% year-on-year at Scotiabank, taking advantage of the end of a heated series in housing markets. Chris Young / The Canadian Press
The disruptions caused by COVID-19 and the war in Ukraine have also increased demand in key areas, Mr Viswanathan said. “These are problems with the supply chain, this is the rise of e-commerce, this is the demand for food.
Bankers are not blind to the gathering economic storm clouds. BMO chief venture chief Pat Cronin said his bank is giving more weight to a hypothetical scenario that predicts the impact of a severe downturn and has lowered expectations for parts of its forecast, which it sees as a baseline option.
When the American banking giant JPMorgan Chase & Co. hosted Investor’s Day this week, CEO Jamie Dimon summed up the outlook as a “strong economy, big storm clouds”, saying those clouds could dissipate. If it was a hurricane, I would tell you. But he acknowledged that they may not be distracted, so we are not willing.
The Bank of Canada released a document this month suggesting that the country’s banks are strong and well-capitalized enough to withstand even a severe, sustained decline, with unemployment peaking at 13.5 percent and housing prices falling by 29 percent.
Gabriel Deschains, an analyst at National Bank Financial Inc., wrote to clients that “under normal circumstances, such optimism would be met with positive expectations of rising stock prices,” but he remains more cautious … while the destructive forces of inflation, which raises expectations of a recession, continues to exist. “
In the second fiscal quarter, Scotiabank earned $ 2.75 billion, or $ 2.16 per share, compared to $ 2.46 billion, or $ 1.88 per share, in the same quarter last year. Adjusted to exclude certain positions, Scotiabank said it had earned $ 2.18 per share, well above the consensus estimate of $ 1.98 per share among analysts, according to Refinitiv.
In the same quarter, BMO earned $ 4.76 billion, or $ 7.13 per share, compared to $ 1.3 billion, or $ 1.91 per share, a year earlier. After an adjustment to exclude one-off items that included a $ 2.6 billion gain on a $ 16.3 billion BMO acquisition of the California-based Bank of the West, the gain was $ 2.187 billion, or $ 3.23 per share. On average, analysts expected $ 3.24 per share on an adjusted basis.
Former Bank of Canada Governor Stephen Polos recently predicted that the country was heading into a period of stagflation – a mixture of slow growth and high inflation. Sean Kilpatrick / The Canadian Press
Both banks raised their quarterly dividends by 3 cents a share to $ 1.03 in Scotiabank and 6 cents a share to $ 1.39 in BMO.
Two key factors that have supported banks’ growing profits over much of the pandemic – fast-growing mortgage balances and unusually low outstanding loan losses – appear to have peaked and are expected to return to normal.
Mortgage balances rose 16% year-on-year at Scotiabank and 8% at BMO, taking advantage of the end of a heated series in housing markets. But this annual growth rate is “slowing”, said Dan Rees, head of Canadian banking at Scotiabank, and is likely to return to a rate of 6 to 9 percent in the coming quarters, even as some economists predict house prices will fall .
Provisions for credit losses – the funds that banks set aside to cover losses in the event of loan default – “hit rock bottom this quarter,” said Phil Thomas, Scotiabank’s chief risk officer. He and his BMO counterpart, Mr Cronin, expect loan loss reserves to rise gradually. But as write-offs and arrears are still very low, none of the risk-takers predict a jump in loan losses, although it will quickly become more expensive for consumers to service their debts.
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