Bank of Montreal (BMO.TO) and Bank of Nova Scotia (BNS.TO) on Tuesday beat third quarter earnings estimates as trade-related risks between the Canada and the United States eased but the lenders remained cautious ahead of the final outcome.
Canada's third and fourth largest banks kick off big bank earnings for the quarter that ended on July 31, benefiting from smaller than expected loan loss provisions, a key indicator of a lender's health where lenders set aside money to prepare for potential loan defaults.
Canada has been holding talks with the United States on a new economic and security relationship for months but the two sides are not close to a deal.
"Earlier this year, my uncertainty meter was very high and today it's less high," BMO's CEO Darryl White said.
"That doesn't mean there's no uncertainty ... but there's just a little less of it."
White, noting that the final outcome on trade is unclear and geopolitical challenges persist, said that most industries were USMCA compliant and government programs would support most impacted industries, limiting the negative impact.
Scotiabank, which has large exposure to Mexico and South America, said the lack of a trade deal with the U.S. and mixed macroeconomic results continue to add uncertainty.
"We remain focused on navigating the macroeconomic environment in Mexico," the lender's chief risk officer Phil Thomas said, adding that clients in the region were adjusting to the shifting trade dynamics.
BMO and Scotiabank have significant exposures outside of Canada, with U.S. making up for about a third of BMO's income, and a tenth of Scotiabank's earnings coming from Mexico and another 10% from the United States.
BMO set aside C$797 million ($576.83 million) in loan loss provisions, compared with analysts' average estimate of C$948.5 million, according to LSEG data, helped by improvement in its U.S. commercial loan book. Scotiabank reported C$1.04 billion in provisions, also below analysts' C$1.19 billion estimate.
The banks had increased loan loss provisions for the past few quarters to prepare for potential mortgage and credit card defaults in a high-interest rate environment while businesses struggled to repay loans, and reduced lending due to trade tensions.
BMO earned C$3.23 per share on an adjusted basis, beating analysts' estimate of C$2.95, according to LSEG data.
Scotiabank reported adjusted earnings of C$1.88 per share, also above the average estimate of C$1.73.
RBC Capital Markets analyst Darko Mihelic said he had positive view on the results, highlighting progress on credit quality at BMO and strong results at Scotiabank's Canadian and international banking segments.
($1 = 1.3817 Canadian dollars)
