Scotiabank, BMO say worst of provisions over after quarterly profit declines

TORONTO (Reuters) - Bank of Nova Scotia BNS.TO and Bank of Montreal BMO.TO, which posted profit declines from a year ago on Tuesday, said they expect provisions for loan losses to pull back in coming quarters even as assistance measures that have kept a lid on delinquencies wind down.

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Scotiabank said its provisions for loan losses, which nearly tripled to C$2.18 billion ($1.65 billion) in the third quarter and led to an earnings miss, are expected to “decline substantially.” The most recent provisions were mainly in its international unit.

Canada’s third-biggest bank said adjusted net income fell to C$1.04 a share in the three months through July, from C$1.88 a year earlier, as profit from its Latin America-focused international division, which was hit by the coronavirus pandemic later than North America, fell.

Even as some economies in Latin America have begun to recover, the bank’s risk appetite in the region “has been adjusted accordingly, taking some lessons from this event,” Chief Risk Officer Daniel Moore told analysts on a conference call.

Much of the risk in Scotiabank’s Latin American business comes from Peru and Colombia, which are dominated by unsecured loans, International banking head Ignacio Deschamps said.

Bank of Montreal BMO.TO, which beat analyst estimates, said its provisions, which also tripled from a year ago to C$1.05 billion, take into account the potential for a "W-shaped" extended economic recovery, in part driven by the winding down of customer assistance programs.

Canada’s fourth-largest lender expects provisions on performing loans to “decline quite substantially” even if delinquencies rise, although there is likely to be stress on particular subsectors, including energy, Chief Risk Officer Pat Cronin said on a separate analyst call.

Scotiabank shares slipped 1.2% to C$55.81 on Tuesday morning in Toronto, while BMO rose 3.3% to C$79.29, on track for its highest close in 5-1/2 months.

Scotiabank said the majority of loans that have exited deferrals - 96% in Canada and 88.8% overseas - remain current.

Total loan deferral balances shrank at both banks with BMO’s total value falling 16% in Canada and 64% in the United States from the prior quarter, and Scotiabank’s declining 26% in Canada and 1.6% overseas.

They account for 12% of Scotiabank’s loan portfolio, from 14% in the prior quarter; and 7% of total BMO loans vs 9%.

Even so, only minor reductions in some deferred loan amounts in Canada despite a reopening of the economy are concerning, Credit Suisse analyst Mike Rizvanovic wrote in a note.

He also flagged “sizeable headwinds” for BMO, as the capital markets performance, which drove its earnings beat, is unlikely to be sustained, and said Scotiabank’s international unit could continue to see “materially suppressed earnings power” in a low-rate environment.

($1 = 1.3188 Canadian dollars)

Reporting by Nichola Saminather in Toronto; Editing Chizu Nomiyama and Matthew Lewis