On Aug. 28, Canada's third-largest bank, BMO, and Scotiabank, Canada's fourth-largest bank, reported results, with quarterly profits missing analysts' expectations as more funds were set aside to cover non-performing loans.
Chart: Bank of Canada
Since last year, the Bank of Canada has raised interest rates 10 times, slowing the housing market, rising consumer debt and delaying mortgage payments, forcing banks to allocate more money to protect against potential loan losses, and dampening earnings growth.
BMO, which bought U.S. regional banks earlier this year, said provision for credit losses has now grown to $492 million, up more than 360 percent from $136 million a year ago.
BMO Bank's earnings were also impacted by its capital markets division's C$162 million severance severance pay and $83 million in legal provisions.
Scotiabank's provision for credit losses roughly doubled from $412 million to $819 million.
This hurt both banks' domestic operations in Canada, resulting in BMO and Scotiabank's Canadian personal and commercial businesses falling 5% and 12%, respectively.
However, BMO Bank's US division grew with the help of a strong dollar. Revenue from Scotiabank's international business, which includes Mexico and other Latin American countries, fell 8%.
BMO reported adjusted net profit of $2.04 billion for the three months ended July 31, down from $2.13 billion a year ago and below expectations, at $2.78 per share, down from $3.09 last year and below analysts' previous forecast of $3.13.
Scotiabank's net profit was $2.23 billion, compared to $2.61 billion a year earlier. On a per-share basis, the bank earned $1.73, 1 point below analysts' expectations.
The move dampened earnings growth at banks, resulting in quarterly profits at BMO, Canada's third-third-largest bank, and Scotiabank, Canada's fourth-largest bank, falling short of analysts' expectations. BMO Bank said its credit loss allowance had risen to $492 million, up more than 360 per cent from $136 million a year ago.
The increase was primarily due to payments by the Capital Markets Division of $162 million in termination severance pay and $83 million in legal provisions. Meanwhile, Scotiabank's provision for credit losses nearly doubled from $412 million to $819 million. The situation hurt the banks' domestic business in Canada, resulting in a 5 per cent decline in BMO and Scotiabank's Canadian personal and commercial business, respectively.
However, BMO Bank's US division grew with the help of a strong dollar. In contrast, revenue from Scotiabank's international business, which includes Mexico and other Latin American countries, fell 8 percent. BMO reported adjusted net profit of 2.04 billion yuan for the three months ended July 31, down from 2.13 billion yuan a year ago and well below analysts' forecasts.
The bank earned $2.78 per share, down from $3.09 a year ago and below analysts' previous forecast of $3.13. Scotiabank's net profit was $2.23 billion, compared to $2.61 billion in the same period last year. On a per-share basis, the bank earned $1.73, 1 point below analysts' expectations.
While facing economic challenges, major banks are still trying to adjust their business structure, optimize their loan loss reserves, and look for new opportunities for short growth periods and long internal periods. These challenges are likely to continue to impact banks' profitability and market performance.