‘Strong start to the year’: Scotiabank, BMO keep steady bank earnings season on track
Despite travelling different routes to get there, Bank of Montreal and Bank of Nova Scotia managed to churn out another set of upbeat results on Tuesday, continuing a solid earnings season for Canada’s big banks.
Cost control and a growing business in Latin America helped Toronto-based Scotiabank report a profit of approximately $2.34 billion for the three months ended Jan. 31, up more than 16 per cent from the first quarter of last year.
“We are pleased with our strong start to the year, and remain focused on driving primary customer growth and delivering an improved customer experience in all of the markets in which we operate,” said Brian Porter, president and chief executive officer at Scotiabank, in a release.
Scotiabank, Canada’s third-largest lender by market cap, said its first-quarter also included a $150-million accounting benefit created by the “remeasurement” of a liability tied to employee benefits.
“On a consolidated basis, the bank beat on most key metrics,” said Scott Chan, analyst at Canaccord Genuity, in a note.
Gabriel Dechaine, analyst at National Bank Financial, wrote that, excluding the one-time gain, the bank’s “outperformance” stemmed from lower core costs and higher trading revenues.
First-quarter revenue for Scotiabank rose three per cent to around $7.09 billion on a year-over-year basis, but non-interest expense, such as salaries and benefits, declined 5 per cent to nearly $3.5 billion.
BMO, meanwhile, had a somewhat rockier road. The fourth-largest lender in Canada reported a 35-per-cent drop in its net income for the first quarter compared to a year ago, to $973 million, after the bank was forced to take a one-time, non-cash charge of $425 million connected to the corporate tax cut in the United States.
Excluding the revaluation of the bank’s U.S.-related net deferred tax asset, which BMO had previously predicted would happen, adjusted net income was $1.42 billion, down about seven per cent. BMO also had to contend with a gain on the sale of Moneris Solutions Corp.’s U.S. operations, which was realized in last year’s first quarter.
Although still beating expectations for its earnings, Chan characterized BMO’s results as “a low-quality beat” compared to the other banks, adding that “BMO’s results are arguably the weakest amongst peers thus far.”
“Overall, improving trends in the United States were supplemented by a notable decline in loan losses,” said Robert Sedran, analyst at CIBC World Markets, in a note. “While the former is encouraging, the latter is less likely to find its way into Street estimates.”
But Bank of Montreal, like the others, will benefit from the reduction in the U.S. corporate tax rate, especially as approximately 25 per cent of BMO’s adjusted earnings flow from south of the border, according to its investor presentation. The lender said reported net income for its U.S. personal and commercial business was $310 million, up 24 per cent from a year ago.
“The constructive economic environment, particularly in the U.S., plays to the strengths of our business mix, with another quarter of increased contribution from our U.S. segment, which grew at a higher rate than the bank overall,” said Darryl White, CEO of BMO Financial Group, in a release.
The showings from BMO and Scotiabank follow Canadian Imperial Bank of Commerce and Royal Bank of Canada reporting solid earnings last week. The Canadian banks have all seen their results benefit from interest rate hikes by the Bank of Canada, as well as the lowering of the U.S. corporate tax rate and relatively good economic growth.
Results from Toronto-Dominion Bank and National Bank of Canada, the remaining members of Canada’s Big Six, are to come later this week.
Scotiabank’s exposure to South America and Mexico, unique among Canadian banks, also paid off for its first-quarter, as net income for its international banking unit grew about 16 per cent year-over-year to $667 million. The bank said this was due in part to “solid loan and deposit growth in Latin America.”
Scotiabank has continued to deepen its ties in South America as well. The lender said at the end of January that its Colombian subsidiary had agreed to buy Citibank’s consumer and small and medium enterprise businesses in Colombia, pending regulatory approval.
Scotiabank also said in December that its $2.9-billion offer for a majority stake in BBVA Chile had been formally accepted by Banco Bilbao Vizcaya Argentaria S.A. Scotiabank said it intended to merge BBVA Chile with its own Chilean business, turning it into the third-largest private-sector bank in Chile.
In spite of its Latin American footprint, Canada still provides the bulk of Scotiabank’s earnings, with the lender reporting that first-quarter profit rose 12 per cent compared to a year go, reaching $1.1 billion.
Scotiabank also announced earlier this month that it would buy independent investment firm Jarislowsky Fraser for approximately $950 million, bolstering the bank’s wealth management earnings. The combination, Scotiabank said, would create Canada’s third-largest active asset manager, with around $166 billion in assets under management.
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