Strong capital-markets earnings lift Bank of Montreal and Scotiabank, but trade uncertainty looms
Bank of Montreal and Scotiabank began Canadian bank earnings season with strong capital-markets results, driven by increased trading activity, according to BNN Bloomberg.
Both banks exceeded analysts’ first-quarter expectations but acknowledged ongoing trade uncertainty in North America. They cautioned that tariffs could create challenges for their clients and impact their credit outlooks.
Bank of Montreal reported adjusted earnings of $3.04 per share, surpassing analysts’ average estimate of $2.42 from a Bloomberg survey. The bank’s capital-markets unit posted adjusted net income of $591m for the quarter ending in January, a 45 percent increase from $408m a year earlier.
Revenue from the division hit a record $2.07bn, with the bank citing “strong client activity” as a key factor.
Following the announcement, Bank of Montreal shares rose as much as 6.1 percent on Tuesday morning, marking their biggest intraday gain since August 2020.
Scotiabank reported adjusted earnings of $1.76 per share, exceeding analysts’ estimate of $1.65. The bank’s global markets and banking division recorded a 33 percent rise in net income, reaching $517m in the first quarter.
Scotiabank CEO Scott Thomson told analysts on a call that the bank saw “particular strength across our capital-market businesses as clients reacted and repositioned their portfolios” in response to economic shifts.
Jefferies Financial Group analyst John Aiken described the banks’ results as positive but warned that capital-markets earnings remain volatile and “may not be fully rewarded by the Street.”
Banks increase credit provisions amid uncertainty
Both banks addressed credit concerns, noting that potential tariffs could affect loans that are currently performing.
Bank of Montreal allocated $152m for provisions on performing loans, slightly lower than last year.
Scotiabank set aside $98m, significantly increasing from $20m in the prior year.
Scotiabank’s total provisions for credit losses rose to $1.16bn, surpassing analysts’ projection of $1.09bn. Its shares fell 2 percent to $70.80 by 10:03 am in Toronto.
Bank of Montreal reported total provisions for credit losses of $1.01bn, which was lower than analysts’ expectation of $1.08bn.
The bank had indicated in December that its fourth-quarter provisions represented a “high point.”
CEO Darryl White confirmed this trend, stating, “Provisions for credit losses declined from the prior quarter as expected, and we initiated our share-buyback program.”
Bank of Montreal’s wealth-management division saw adjusted net income increase by 53 percent from the previous year, while its US personal and commercial banking division posted a modest 2 percent gain.
However, the bank’s Canadian operations saw adjusted earnings decline by 3 percent, affected by higher expenses and loan-loss provisions.
Scotiabank analyst Meny Grauman noted that “all other segments beat the Street as well,” highlighting that Bank of Montreal had entered 2024 showing progress on addressing credit challenges.
US expansion and impact of trade tensions
Bank of Montreal expanded its US presence in 2023 by acquiring San Francisco-based Bank of the West, increasing exposure to both credit risks and opportunities.
Nearly half of the bank’s capital-markets revenue now comes from the US, which could offer some protection against economic challenges in Canada.
Scotiabank benefited from lower interest rates, with net interest income rising 8.4 percent to $5.17bn.
However, year-over-year earnings fell in both its Canadian and international banking divisions due to higher provisions for loan losses.
The Bank of Canada has lowered its policy rate by 200 basis points to 3 percent in under eight months. Analysts expect Scotiabank to benefit the most among Canadian banks due to its higher funding costs.
Scotiabank has also realigned its focus away from Latin America, selling some South American assets while concentrating on North America.
In late 2023, it acquired a 14.9 percent stake in Cleveland-based KeyCorp and announced in January that it would transfer its Colombian, Costa Rican, and Panamanian operations to Banco Davivienda SA.
The bank reported a $1.36bn after-tax impairment loss related to this transfer, which contributed to a 55 percent decline in reported net income to $993m.
Analysts expect banks to build more credit provisions
According to Reuters, Canada’s major banks are expected to increase credit-loss provisions as they prepare for uncertainty surrounding US tariffs.
Analysts warned that this could weigh on first-quarter earnings and beyond. Banks have already set aside more funds to cover potential loan defaults amid persistently high Canadian unemployment, a key concern for investors despite some recent signs of economic resilience.
With US President Donald Trump’s administration threatening a 25 percent tariff on all non-energy Canadian imports starting in March, banks may need to further expand their reserves.
RBC Dominion Securities analyst Darko Mihelic stated, “(We) expect large banks to build larger performing provisions for credit losses than we previously believed... we also believe pessimistic scenario assumptions may become more pessimistic.”
First-quarter loan-loss provisions are expected to rise by 6.4 percent for Royal Bank of Canada and as much as 80 percent for Bank of Montreal, according to LSEG data.
CIBC is projected to see a slight 0.7 percent decrease. Analysts forecast first-quarter net income changes ranging from a 7.5 percent decline for Bank of Montreal to a 13.8 percent increase for Royal Bank of Canada.
Mihelic estimated that total provisions will increase by about 70 percent to $5.6bn, with core earnings declining by roughly 10 percent year-over-year.
Canadian banks will release their earnings throughout the week. Trump’s tariff threats have already weighed on bank stocks and the Toronto Stock Exchange, as concerns grow about the potential for a recession.
Scotiabank analyst Meny Grauman predicted that tariffs would be a major topic during earnings discussions, stating, “The potential impact of tariffs on all of these key earnings drivers is likely to dominate the earnings calls this quarter.”
He added that analysts will be watching how banks adjust provisions to account for trade risks.
Stock performance has varied among major banks. RBC, Scotiabank, CIBC, and National Bank shares have declined between 2.3 percent and 6 percent this year, while the Toronto Stock Exchange has gained 3 percent.
Meanwhile, TD Bank and Bank of Montreal shares have risen 12 percent and 2.5 percent, respectively.
Scotiabank remains the only major Canadian bank focused primarily outside the US, with a strategy centred on the $1.5tn North American trade corridor.
Analysts warned that the bank could be particularly vulnerable if tariffs disrupt cross-border trade.
CIBC analyst Paul Holden noted that Scotiabank’s stock performance depends on trade negotiations.
“We could return to a more positive call if Mexico and Canada are able to negotiate relatively harmless tariffs. Until that happens, we think it will be hard for (Scotiabank’s) stock to be a relative outperformer,” Holden said.
With four of Canada’s big six banks yet to report their earnings, analysts are closely monitoring how lenders prepare for potential trade disruptions.
