BMO, National Bank profits top expectations as tariff tension looms
Bank of Montreal BMO-T and National Bank of Canada NA-T reported second-quarter earnings that topped analysts' expectations even as the lenders set aside more money for loans that could default as risks mount over tariff tensions.
As uncertainty over U.S. trade and fiscal policy raises the risk levels of certain borrowers, two of Canada's largest banks are provisioning for potential loan losses across the country's consumers and businesses.
'The uncertainty related to global trade tensions and ongoing negotiations continues to be an overhang on the economy. Increasing geopolitical and geoeconomic instability, and projected fiscal deficits in major economies are making the path of growth and inflation difficult to forecast,' National Bank chief executive officer Laurent Ferreira said during a conference call with analysts.
'That being said, the latest developments regarding global trade negotiations seem to be progressing in the right direction.'
A breakdown of the big banks' second-quarter earnings so far
BMO chief risk officer Piyush Agrawal said that while provisions for loans on the verge of defaulting were lower this quarter, the weakening economic outlook prompted the bank to bolster reserves for loans that are still being repaid.
'We remain cautious given the ongoing uncertainty and volatility in the economic environment related to trade policies,' Mr. Agrawal said during a conference call.
'The outlook for the Canadian economy has weakened with rising unemployment and declining GDP growth. The U.S. market has shown resilience, but momentum has softened.'
In the quarter, BMO set aside $1.05-billion in provisions for credit losses – the funds banks set aside to cover loans that may default. That was higher than analysts anticipated, and was driven by a higher reserves for debt that is still in being repaid.
BMO set aside $289-million for these types of loans, up from $152-million last quarter. Rising risk in Canadian commercial banking and Canadian unsecured consumer lending drove the increase.
In the quarter, National Bank set aside $545-million in provisions and included $315-million against loans that are still being repaid. Last quarter, National reserved $254-million in provisions.
While the increase was in part due to rising risk in loans, National also set aside $230-million in provisions stemming from its takeover of Edmonton-based Canadian Western Bank. Excluding provisions from CWB, National's reserves were slightly above analysts' estimates.
With Canadian banks reporting their first full quarter of financial results since U.S. President Donald Trump launched a trade war, analysts expected Canada's banks to continue grappling with higher loan loss reserves.
Over the past week, Toronto-Dominion Bank posted results that beat analyst estimates and Bank of Nova Scotia missed expectations.
TD and Scotiabank also increased their provisions, citing concerns over a deteriorating economy stemming from heightened uncertainty in U.S. trade and fiscal policy. Analysts have said that the increase in reserves represents the banks' conservative approach in preparing for potential loan losses, and is not an indication that loans are defaulting.
Royal Bank of Canada and Canadian Imperial Bank of Commerce release results on Thursday.
BMO earned $1.96-billion in the three months that ended April 30, a 5-per-cent increase from the same quarter last year. Adjusted to exclude certain items, the bank said it earned $2.62 per share, beating the $2.55 per share analysts expected, according to S&P Capital IQ.
National Bank's net income decreased by 1 per cent to $896-million, or $2.17 per share. Adjusted to exclude certain items, including acquisition and integration costs related to the acquisition of Canadian Western Bank, the bank said profit climbed 29 per cent, earning $2.85 per share. That edged out the $2.40 per share analysts expected.
In the beginning of the quarter, National closed its takeover of Edmonton-based CWB, significantly expanding its footprint in Alberta and British Columbia. National is in the process of integrating Canada's ninth-largest lender, a process that is currently driving up costs.
Total revenue rose 33 per cent in the quarter to $3.65-billion, while expenses jumped 32 per cent to $1.94-billion
BMO and National both raised their quarterly dividends by 4 cents to $1.63 per share and $1.18 per share respectively.
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