Profits just about double at BMO and Scotia as big banks post quarterly earnings

Bank of Montreal and the Bank of Nova Scotia kicked off the quarterly earnings seasons for Canada's five biggest lenders with a bang on Tuesday, revealing sharply higher profits and far less money set aside for bad loans.

BMO earned just over $2.2 billion in the three months up until the end of July, 85 per cent more than it did in the same period a year ago.

"With the economic recovery continuing to take hold, and as communities adapt to the most recent pandemic developments, we are committed to helping our clients make real financial progress and supporting their growth ambitions," CEO Darryl White said in a release.

A year ago, Bank of Montreal had set aside more than $1 billion to potentially write off loans that the bank thought may go bad, a metric known as "provisions for credit losses."

In the early days of the pandemic, Canada's big five banks — RBC, TD, Scotia, BMO and CIBC — set aside more than $5 billion in such provisions to potentially write off loans that they worried might go bust because of the pandemic.

But a year later, it's a much different story. BMO managed to completely reverse that potential red ink and release $70M worth of loans it had written off and put them back on the positive side of its ledger. 

Profits were up in just about every part of BMO's business, from the core Canadian retail banking unit to its U.S. division, along with wealth management and its trading unit.

Scotiabank profits rise, too

It was a similar story at Bank of Nova Scotia, which reported a quarterly profit of just over $2.5 billion. This time last year, Scotia's profit was a little more than half that, at $1.3 billion.

Just like BMO, Scotiabank saw a big decline in its loan loss provisions, with the bank's figure falling from $2.1 billion last year to just $380 million this year.

Paul Gulberg, an analyst with Bloomberg intelligence, says on the whole the financial performance of both banks was quite strong. "They've both done really well in terms of reserve releases," he said in an interview with CBC News. "They are seeing stronger than expected economic environment. They're seeing less impairments in their loan book. So they're releasing a lot of reserves that they filled out last year — better than they anticipated," he said. 

Canada's three other major lenders will reveal their quarterly numbers in the coming days, with Royal Bank reporting on Wednesday and CIBC and TD following up on Thursday.

Canary in the economic coal mine

Economists and financial analysts pay close attention to the earnings at Canada's big banks because they are seen as a proxy for the overall economy. If banks have strong profits, that means the companies that they do business with are also doing well, which suggests the economy is expanding. Conversely, if the banks aren't doing well, that suggests their customers are not doing well enough to borrow and invest more either, which is a bad sign for the economy.

Normally when profits are growing, the banks would take some of those profits and give them back to shareholders in the form of dividend increases. But they can't do that right now because early on in the pandemic, Canada's financial regulator OSFI (Office of the Superintendent of Financial Institutions) forbade them from doing so, in case the banks needed that excess cash to navigate the uncertain waters to come.

"OSFI expects that banks will use the additional lending capacity to support Canadian businesses and households," the regulator said in March of 2020 when the pandemic was first unfolding.

Other countries put similar holds on dividend hikes, but since then, many have loosened those restrictions. The U.S., for example, removed that rule in June. So far, Canada has failed to wind down that ban, but at least one bank watcher says it's time to get rid of it.

"At this point in the recovery, we believe there is no compelling policy reason to continue with the cap. In fact, as time goes by, the cap seems less and less logical.," Rob Wessel, co-founder of Hamilton ETFs wrote to clients in a note this week. "We believe an equally strong case for lifting the cap would be to support the large number of Canadians who rely on bank dividends for income and help alleviate some financial challenges relating to the pandemic."