Canadian growth propels Scotiabank, BMO to profit beats

TORONTO (Reuters) - Canadian lenders Bank of Nova Scotia and Bank of Montreal posted higher-than-expected quarterly earnings, reaping the benefits of a domestic economy growing at its fastest rate in years.

A Bank of Nova Scotia (Scotiabank) sign is seen outside of a branch in Ottawa, Ontario, Canada, May 31, 2016. REUTERS/Chris Wattie

Canada’s economy grew 4.6 percent in the year leading up to May, according to Statistics Canada, as growth in energy and manufacturing drove the biggest increase since 2000. Banks are benefiting as small business customers, in particular, show more confidence to borrow.

So far, expectations of further growth have outweighed concerns about sharp declines in Toronto house prices or trade negotiations with the United States and Mexico. Still, shares of both banks fell along with other financial stocks as investors fretted about North Korea firing a missile over northern Japan.

Scotiabank’s head of Canadian banking James O’Sullivan said the outlook for the country’s economy had improved since early this year, boosting confidence of small business customers.

“Certainly when I speak to commercial customers across the country, they’re feeling pretty good about this country’s prospects. We’re seeing that clearly in loan volumes,” he told analysts on a conference call.

O’Sullivan told reporters he expected residential mortgage growth to moderate due to government measures to cool markets in Toronto and Vancouver, but he still anticipated the bank’s Canadian business will achieve annual earnings growth of 6 to 9 percent in the medium term.

Scotiabank, Canada’s third-biggest lender, said earnings per share rose to C$1.68 from C$1.55 a year earlier. Analysts had expected EPS of C$1.64.

The bank reported net income of C$2.10 billion, compared with C$1.96 billion a year ago, including a 12 percent rise in net income at its domestic business to C$1.05 billion.

However, profit rose only 1.9 percent at the bank’s four key overseas markets of Mexico, Peru, Chile and Columbia, where it has centered its strategy for growth.

BMO, Canada’s fourth-biggest lender, reported earnings per share, excluding one-off items, rose to C$2.03 from C$1.94 a year ago. Analysts had on average expected EPS of C$2.00, according to Thomson Reuters I/B/E/S.

Net income at the bank’s Canadian retail business grew 9 percent to C$614 million but net income at its U.S. business was flat at C$278 million.

BMO’s Chief Financial Officer Tom Flynn also gave a positive outlook for Canada’s economy.

“It’s looking more healthy than it was looking earlier in the year,” he said.

Shares in BMO were down 2.4 percent while Scotiabank was down 0.8 percent.

“Given that investors overweight on BMO shares are likely positioned as such due to its above-average exposure to U.S. banking, we expect any relative upside will be muted given the weaker loan trends,” said Eight Capital analyst Steve Theriault.

Royal Bank of Canada and Canadian Imperial Bank of Commerce also reported better-than-expected earnings last week. Toronto-Dominion Bank will be the last major Canadian bank to report earnings on Thursday.

Reporting by Matt Scuffham, editing by Meredith Mazzilli and David Gregorio