Bank of Montreal and Bank of Nova Scotia shares dropped after both Canadian banks missed earnings estimates, with loan-loss provisions higher amid a macroeconomic outlook that's continuing to darken.
Scotiabank set aside C$709 million ($523 million) for potentially souring loans, while Bank of Montreal has C$1.02 billion in provisions for credit losses. Bank of Montreal's numbers included an initial of C$517 million on the performing-loan portfolio of Bank of the West, the bank said in a statement Wednesday.
It's the first time Bank of Montreal has reported results that include the San Francisco-based lender, which it bought from BNP Paribas SA for $16.3 billion.
"The higher-interest-rate environment is finally starting to bite on the consumer and on borrowers in general," Philip Petursson, chief investment strategist at IG Wealth Management, told BNN Bloomberg Television. "When they are saying we need to increase provisioning, they're saying we see headwinds for the economies of Canada and the U.S."
Bank of Montreal shares fell 3.5% to C$113.33 at 9:41 a.m. in Toronto, while Scotiabank slipped 2.2% to C$65.02. Bank of Montreal has declined 7.6% this year and Scotiabank is down 2.1%, compared with a 3.3% drop for the S&P/TSX Commercial Banks Index.
Banks enjoyed a period of pristine credit quality after governments responding to the pandemic flooded their economies with liquidity. Banks have long projected that those trends will eventually normalize, which means putting more into reserves for loans that borrowers are unable to pay off.
Scotiabank's net interest margin — the difference between what the bank earns from loans and what it pays depositors — was 2.13% in the fiscal second quarter, compared with 2.11% in the previous three months and 2.23% a year earlier. Excluding some items, profit totaled C$1.70 a share, less than the C$1.76 average estimate of 11 analysts in a Bloomberg survey.
Meanwhile, Toronto-based Bank of Montreal reported 1.69% in net interest margin, the same level as a year earlier and above analysts' expectations. Earnings excluding some items totaled C$2.93 a share, missing the C$3.21 average estimate of analysts in a Bloomberg survey.
"Overall, we have a negative view" on Bank of Montreal's results "as adjusted EPS was below our forecast and consensus on high expenses though capital seems solid," RBC Capital Markets analyst Darko Mihelic said in a note to clients.
Scotiabank's higher set-asides for credit losses hurt net income in both the Canadian banking and the global banking and markets segments. The Canadian banking segment also dealt with higher noninterest expenses, with revenue up from a year earlier countering the increase.
Scotiabank's international division — centered on Chile, Colombia, Mexico and Peru — sets the lender apart from Canada's North America-focused banks, with the unit weighing on the lender's shares in recent years. Scott Thomson, who took over as chief executive officer of Toronto-based Scotiabank earlier this year, said in February that the division's "returns are not commensurate with our expectations in certain countries" and that the firm is "in the process of assessing our international business mix."
The unit's net interest margin rose to 4.12% in the three months through April from 4% in the fiscal first quarter.
The Federal Reserve said Tuesday that it ended an enforcement action against the Canadian lender related to its anti-money-laundering controls.
—With assistance from Sandra Mergulhao
