BMO, Scotiabank beat expectations, but beyond the numbers, concerns arise | iNFOnews | Thompson-Okanagan's News Source
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BMO, Scotiabank beat expectations, but beyond the numbers, concerns arise

Original Publication Date February 28, 2017 - 8:30 AM

TORONTO - Two of Canada's big banks reported first-quarter results Tuesday that were higher than expected, but the earnings were driven by potentially unstable trading revenues as slowing loan growth and rock-bottom interest rates offset gains.

The Bank of Montreal (TSX:BMO) reported net income of $1.49 billion, up 39 per cent from a year ago. After adjustments, the profit amounted to $2.28 per share, beating analyst expectations of $1.88 per share by a wide margin, according to data compiled by Thomson Reuters.

Scotiabank (TSX:BNS), which also reported Tuesday, had $2.01 billion of net income during the first quarter, up 10 per cent compared to the same period last year. On an adjusted basis, the bank had $1.58 of earnings per diluted share, just one penny higher than analyst estimates.

While the headline figures may seem strong, Edward Jones analyst Jim Shanahan cautioned that income from trading and other capital markets activities provided much of the boost.

That's potentially problematic because trading activities are generally not considered reliable sources of earnings growth, Shanahan said.

"Fee income can be volatile," he said.

Trading activity was robust during the quarter as the election of President Donald Trump created expectations of greater economic growth in the U.S.

"But that may not be the case next quarter, or for the balance of the year," Shanahan said.

Net-interest income at the banks — the profit generated from loans — felt the weight of low interest rates and stunting consumer loan growth.

"With the lower interest rate environment that we're in there's still continuous downward pressure," Scotiabank chief financial officer Sean McGuckin said during an interview.

Debt-laden consumers have begun tapping out at a time when Canadian household debt has hit record highs. Statistics Canada reported in December that the ratio of household credit market debt to adjusted disposable income climbed to 166.9 per cent in the third quarter — up from 166.4 per cent in the previous quarter.

"You can either grow net-interest income by growing your loan portfolio or generating higher margins," Shanahan said. "There's no loan growth, and margin growth is hard to achieve when interest rates are as low as they are."

Going forward, McGuckin said the bank expects Canadian consumer loan growth to be in the mid-single digits.

"We've had outsized retail growth two years, three years, four years, five years ago, as an industry," he said. "Now you'll see us grow a bit more in line with the nominal GDP outlook for the country."

Shares of Scotiabank on the S&P/TSX composite index were down 2.3 per cent, or $1.80, in late afternoon trading to $77.45. BMO climbed two per cent, or $1.98, to $100.56.

CIBC (TSX:CM) and Royal Bank (TSX:RY), which both reported last week, also beat analyst expectations. TD Bank (TSX:TD) will wrap up the banks' earnings season Thursday.

BMO also reported $5.41 billion of revenue, up from $5.08 billion a year ago. Scotiabank increased its revenue to $6.87 billion from $6.37 billion during the first period of last year.

Scotiabank also increased its quarterly dividend by two cents to 76 cents per share, while BMO announced plans to return capital to shareholders by buying back 15 million of its shares.

Follow @alexposadzki on Twitter.

News from © The Canadian Press, 2017
The Canadian Press

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