Canadian banks brace for tariff risks as capital-markets gains drive first-quarter earnings growth
Bank of Montreal and Bank of Nova Scotia opened Canada's bank earnings season with strong capital-markets results driven by increased trading activity, according to BNN Bloomberg.
Both banks exceeded analysts' fiscal first-quarter estimates, but also highlighted trade uncertainty in North America and warned that tariffs could challenge clients and affect credit outlooks.
Bank of Montreal reported $3.04 per share in adjusted earnings, surpassing the $2.42 consensus estimate from Bloomberg's analyst survey.
The bank's capital-markets unit recorded $591m in adjusted net income for the three months ending January, a 45 percent increase from $408m a year earlier.
The division achieved record revenue of $2.07bn, which the bank attributed to “strong client activity.”
Shares of Bank of Montreal rose as much as 6.1 percent on Tuesday morning, marking their largest intraday gain since August 2020.
Scotiabank reported $1.76 per share in adjusted earnings, higher than the $1.65 average estimate. The bank stated that net income in its global markets and banking division grew 33 percent to $517m in the first quarter.
CEO Scott Thomson told analysts on a conference call that the capital-markets business experienced “particular strength” as clients adjusted portfolios in response to economic changes.
Jefferies Financial Group analyst John Aiken called the banks' results positive but noted that capital-markets earnings can be volatile and “may not be fully rewarded by the Street.”
Both banks addressed concerns over potential tariffs and their effect on performing loans.
Bank of Montreal set aside $152m in provisions for performing loans, a slight decrease from the previous year, while Scotiabank increased its allocation to $98m from $20m.
Scotiabank’s total provisions for credit losses reached $1.16bn, exceeding the $1.09bn analysts had forecast, and its shares fell 2 percent to $70.80 by 10:03 am in Toronto.
Bank of Montreal's provisions for credit losses stood at $1.01bn, lower than analysts' $1.08bn forecast.
US President Donald Trump's administration has introduced uncertainty regarding US trade with Canada and Mexico, where Scotiabank operates extensively.
Reuters reported that analysts expect Canadian banks to increase credit loss provisions amid these uncertainties.
RBC Dominion Securities analyst Darko Mihelic stated that expectations for larger performing loan provisions have grown, and “pessimistic scenario assumptions may become more pessimistic.”
Loan loss provisions among Canada's major banks are projected to rise significantly.
According to LSEG data, provisions are expected to increase by 6.4 percent for Royal Bank of Canada and up to 80 percent for Bank of Montreal.
In contrast, CIBC’s provisions are expected to decline by 0.7 percent. Analysts forecast a 70 percent increase in total provisions to $5.6bn and an approximate 10 percent year-over-year decrease in core earnings for the first quarter.
Scotiabank has adjusted its international strategy by reducing its presence in Latin America.
It recently completed the sale of its operations in Colombia, Costa Rica, and Panama to Banco Davivienda SA, incurring an after-tax impairment loss of $1.36bn in the first quarter.
This contributed to a 55 percent year-over-year decline in reported net income to $993m.
Bank of Canada’s recent 200-basis-point rate cut to 3 percent over eight months has influenced banks' performance.
Analysts consider Scotiabank the most affected Canadian bank due to its higher funding costs. Net interest income for the bank rose 8.4 percent to $5.17bn in the quarter.
The broader Toronto Stock Exchange has gained 3 percent this year, but Canadian banks have seen mixed stock performance.
While TD Bank and Bank of Montreal have gained 12 percent and 2.5 percent respectively, four other major banks—including Scotiabank—have experienced declines ranging from 2.3 to 6 percent.
Scotiabank’s focus on the North American trade corridor leaves it exposed to potential tariff disruptions.
CIBC analyst Paul Holden stated that Scotiabank's stock performance may lag unless Canada and Mexico negotiate “relatively harmless tariffs.”
Analysts expect trade risks to dominate bank earnings discussions this quarter.
