The Bank of Montreal reported a modest increase in second-quarter earnings on Wednesday. Nathan Denette / The Canadian Press
Senior executives at two major Canadian banks predict that they may continue to add new loans and increase profits in the coming quarters, offering an optimistic view for the financial sector that is at odds with the increasingly bleak forecasts of economists of a recession.
Bank of Nova Scotia BNS-T and Bank of Montreal BMO-T reported higher second-quarter earnings on Wednesday, supported by strong demand for personal and business loans, as well as lower-than-expected loan loss reserves. analysts. Earnings rose 12 percent compared to the same quarter last year at Scotiabank, and 4 percent after adjustments to BMO, as rising interest rates helped increase margins of loans.
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This marked a good start to the earnings season for major banks, but analysts warned that these results, which cover the three months ended April 30, are already far behind. Top executives pressured on how banks are preparing for a deteriorating economic environment marked by war in Ukraine, high inflation, rapid central bank rate hikes and the growing prospect of a recession that could slow customers’ appetite for loans.
Bank executives and chief financial officers stressed that they still expect economies to grow as COVID-19-related headwinds subside. They noted that most households are in good financial health, as many saved extra savings during the pandemic, while unemployment remains low in a tight labor market. Companies are taking out loans to increase stocks as demand for products exceeds supply and some sectors, such as commodities, are booming.
“The macroeconomic context of our key geographies remains positive,” Scotiabank CEO Brian Porter said in a conference call with analysts on Wednesday. “Despite the macroeconomic and geopolitical uncertainties of recent months, we are encouraged by the resilience of our businesses.”
The mood among economists is much more unfavorable as the threat of a global recession increases, although few predict that it is very likely. The tone has also been bleak when business leaders and policymakers discussed the World Economic Forum meeting in Davos. And former Central Bank Governor of Canada Stephen Poloz recently predicted that the country is heading for a period of stagnation: a mix of slow growth and high inflation.
However, increases in bank loan balances have been widespread, and BMO Chief Financial Officer Tayfun Tuzun said in an interview that he still expects “high-digit loan growth” year after year. same guidance he gave three months ago.
“Together, our clients tell us that they are still interested in investing in their business,” said Mr. Tuzun. He added that there are “many good indicators of what is to come” for the bank.
A particularly bright spot is commercial lending in Canada, where loan balances rose 13 percent in BMO and 19 percent in Scotiabank in the second quarter. Scotiabank Chief Financial Officer Raj Viswanthan said corporate customers and consumers have “very strong” balance sheets at the moment, “so we see great demand being suppressed”.
Mortgage balances rose 16 percent year-on-year in Scotiabank, benefiting from the end of a strong streak for real estate markets.Chris Young / The Canadian Press
Interruptions caused by COVID-19 and the war in Ukraine have also increased demand in key areas, Mr. Viswanathan. “It’s supply chain problems, it’s the rise of e-commerce, it’s the demand for food.”
Bankers are not blind to the clouds of economic storm. BMO risk director 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 that considers the case base.
When the American banking giant JPMorgan Chase & Co. organized an investor day this week, CEO Jamie Dimon summed up the outlook as “strong economy, big storm clouds”, saying these clouds “can dissipate”. If it were a hurricane, I’d tell you. “But he acknowledged that” it may not dissipate, so we’re not excited. “
The Bank of Canada released a document this month suggesting that the country’s banks are strong enough and well-capitalized to withstand even a severe and prolonged fall in unemployment to 13.5% and housing fall 29%.
Gabriel Dechaine, an analyst at National Bank Financial Inc., wrote to clients that, “in a normal environment, this optimism would be met with positive expectations for the stock price appreciation,” but remains cautious. .. as long as the disruptive forces of inflation that increase expectations of recession persist “.
During 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 items, Scotiabank said it 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 adjusting to exclude specific items that include a $ 2.6 billion profit in a financial instrument linked to the $ 16.3 billion BMO acquisition of California-based Bank of the West, the profit was of $ 2.187 million, or $ 3.23 per share. On average, analysts expected $ 3.24 per share on a tight basis.
Former Bank of Canada Governor Stephen Poloz recently predicted that the country is heading for a period of stagnation, a mix of slow growth and high inflation. Sean Kilpatrick / The Canadian Press
Both banks increased their quarterly dividends, by 3 cents a share to $ 1.03 at Scotiabank, and by 6 cents a share to $ 1.39 at BMO.
Two key factors that have supported the rise in bank profits during much of the pandemic: rapidly rising mortgage balances and unusually low losses on delinquent loans appear to have peaked and are expected to return to higher levels. normal.
Mortgage balances rose 16 percent year-on-year in Scotiabank and 8 percent in BMO, benefiting from the end of an intense streak for housing markets. But this annual growth rate is “slowly slowing,” said Dan Rees, Scotiabank’s Canadian head of banking, and is likely to return at a 6-9% rate in the coming quarters, though some economists predict housing prices. will fall.
Provisions for credit losses, the funds that banks set aside to cover losses in the event of loan defaults, “have hit the ground running this quarter,” said Phil Thomas, Scotiabank’s chief risk officer. He and his BMO counterpart, Mr. Cronin, expect that loan loss reserves will gradually increase. But with cancellations and delays still very low, none of the risk agents predict an increase in loan losses, although it will quickly become more expensive for consumers to pay off their debts.
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