BMO, Scotiabank top estimates as capital-markets units surge

By Christine Dobby

(Bloomberg) — Bank of Montreal and Bank of Nova Scotia kicked off Canadian bank earnings with better-than-expected results across their businesses, helped by strong capital-markets performance as elevated trading activity continued.

The Toronto-based lenders reported momentum in businesses outside Canada — U.S. personal and commercial banking for Bank of Montreal, and international for Scotiabank — where analysts and investors have been looking for improvement.

The results also suggested credit conditions continue to stabilize, with both banks reporting provisions for potentially souring loans that were below analyst forecasts and down from the previous quarter.

Bank of Montreal earned $3.96 a share on an adjusted basis in its fiscal third quarter, according to a statement Tuesday, more than the $3.75 average analyst estimate in a Bloomberg survey. Scotiabank’s adjusted earnings were $2.28 a share for the three months through July, it said, versus the $2.01 forecast.

Scotiabank Chief Executive Officer Scott Thomson said on a conference call with analysts that it was a “record quarter for the bank, as we reported strong earnings across all lines,” while Bank of Montreal CEO Darryl White similarly pointed to record pre-provision, pretax earnings in all units, “with sustained momentum in capital markets and wealth management, and continued commercial loan growth in both Canada and the US.”

Both CEOs said the latest round of U.S. tariffs on Canadian exports appears manageable for both the country’s economy and the banks’ clients. They said government support for affected sectors, expected to be announced later Tuesday, should help mitigate the effects and called on Ottawa and the provinces to use the moment to speed up regulatory approvals and slash red tape.

Shares of Scotiabank were up 2.9% as of 9:45 a.m. in Toronto, while Bank of Montreal climbed 0.5%.

Adjusted net income at Bank of Montreal’s U.S. banking business totalled $925 million in the three months through July, better than the $846 million average estimate of three analysts in a Bloomberg survey. In the capital-markets division, adjusted net income totaled $649 million, topping the $601 million average forecast.

Bank of Montreal has pegged the US business as a key area of focus amid a push to improve return on equity across the company. The firm has combined all of its U.S. operations into one unit, exited less profitable loan portfolios and sold bank branches to shift resources to California and other priority areas.

Equity trading

The firm’s capital-markets franchise skews heavily toward equity trading, National Bank of Canada analyst Gabriel Dechaine wrote in a recent report, an area where U.S. banks saw revenue surge in the three months through June. Bank of Montreal reported $1.34 billion in global-markets revenue in its fiscal third quarter, up 27% from a year earlier.

“We view the strength from its U.S. retail bank as a distinct positive,” Jefferies Financial Group Inc. analyst John Aiken wrote in a report, noting that meant the firm didn’t rely on its wealth and capital-markets units to top estimates.

Overall net income was $1.75 billion, less than the $2.34 billion forecast, after charges tied to the sale of its transportation-finance business and a higher expected earn-out payment for its acquisition of wealth manager Burgundy.

Bank of Montreal set aside $722 million in provisions for loan losses in the quarter, less than the $768 million consensus forecast, while Scotiabank recorded $1.08 billion in provisions, also lower than the $1.13 billion average estimate.

International strategy

At Scotiabank, the international business turned in earnings of $725 million, beating the average forecast of $629 million. The bank has slashed expenses, centralized operations at the unit and sold some assets in Latin America. It’s also been investing more in the U.S., including through a larger push into capital markets and a stake in Cleveland-based KeyCorp.

Its capital-markets business exceeded estimates by an even wider margin, with earnings of $647 million, better than the $514 million average estimate and up 37% from a year earlier. Aiken called it a “surprisingly strong” performance, but cautioned that “while we anticipate that Scotia’s results will be viewed positively by the market, we do not expect that the full 8% beat will be automatically priced into its valuation.”

The bank reported overall net income attributable to shareholders of $2.91 billion, more than the $2.63 billion analysts forecast.

Scotiabank is almost three years into a new strategy under Thomson and this is a pivotal year for the bank to begin showing results. Its shares have soared this year along with all of Canada’s Big Six banks, though the stock has lagged behind its peers. Bank of Montreal, meanwhile, has been among the top performers in the group as its revamped U.S. business shows signs of promise.

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