Canada's RBC, BMO offer subdued outlook, miss profit estimates as bad loan provisions surge

TORONTO (Reuters) - Royal Bank of Canada and Bank of Montreal on Wednesday offered subdued outlooks after missing quarterly earnings expectations as they increased provisions more than six-fold to cover future loan losses due to the COVID-19 outbreak.

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RBC shares climbed 2.9% in morning trade, while BMO fell 0.2% versus a 2.5% gain in the benchmark banks index.

While much of the spikes in provisions were for performing loans, they nevertheless point to banks’ expectations for a surge in loan losses due to the pandemic.

On Tuesday, Bank of Nova Scotia and National Bank of Canada also reported steep declines in profits.

Shares of National Bank, which reported after markets closed, rose 4% on Wednesday.

“Given the historic level of economic stress due to COVID-19, we would not expect to see a reduction in impaired loan losses over the next few quarters,” and even expect increases in some troubled sectors, such as energy, Patrick Cronin, chief risk officer at BMO, said on an analyst call.

BMO, Canada’s fourth-biggest bank, posted adjusted profit of C$1.04 per share for the three months through April, compared with expectations for C$1.22, as its capital markets business recorded a surprising loss.

But its provisions of C$1.1 billion were lower than expected, prompting analyst concerns about their adequacy.

RBC, the nation’s biggest lender, reported adjusted earnings of C$1.03 per share, missing estimates for C$1.58, as provisions jumped to C$2.8 billion, from C$426 million a year earlier.

“We favour management’s more conservative approach to provisioning that we believe positions Royal bank on a more solid footing for the uncertainty that lies ahead,” Credit Suisse analysts wrote in a note.

Earnings and returns on equity will remain suppressed, but should pick up in 2022 when the economy recovers, RBC Chief Financial Officer Rod Bolger said on an analyst call.

Reporting by Nichola Saminather in Toronto; Additional reporting by Abhishek Manikandan and Noor Zainab Hussain in Bengaluru; Editing by Shinjini Ganguli Bernadette Baum and Nick Zieminski