Profits dip as BMO and Scotiabank set aside hundreds of millions to cover bad loans

Two of Canada's biggest lenders revealed quarterly earnings on Wednesday that suggest a gloomier outlook for Canada's economy, with sharply lower profits and a large jump in the amount of money they're setting aside to cover bad loans.

Bank of Montreal and Scotiabank posted quarterly results before stock markets opened on Wednesday, and while the exact numbers differed, they shared some worrisome themes.

Scotiabank said it made a profit of just over $2.1 billion in the three months up until the end of April, a decline of 21 per cent from the $2.7 billion it earned the same time last year. On an adjusted basis, the bank's profit came in at $1.70 per share. That's less than the $2.16 from this time last year and also less than the $1.76 that analysts were expecting.

Part of the profit drop came because the bank set aside a lot more money to cover potentially bad loans on its books. Known as "provisions for credit losses," the closely watched metric tracks the amount of money that the bank sets aside on its books to write off loans that it thinks might go sour.

The bank set aside $709 million during the quarter. In the same period a year ago, its provisions for credit losses were only $219 million.

It was a similar story at the Bank of Montreal, where the bank set aside more than $1 billion for bad loans. That's way up from the $50 million it recorded the same time a year ago.

A big part of that increase in credit loss provisions came because of the loan book inherited from Bank of the West, an American bank that BMO purchased last December and finalized in February. The acquisition was the biggest one in BMO's history, and while it may help the bank expand its presence in the United States over the long term, in the short term it came with at least $705 million worth of loans that the bank is electing to move into its provisions for credit losses.

James Shanahan, an analyst who covers the Canadian banks for money manager Edward Jones, says while the loan provisions at BMO saw a large increase any way you slice it, they didn't come as a surprise.

"Any time a bank buys another bank they look at the loan book and they usually decide the quality of the loan portfolio is generally less than their own," he told CBC News. "It makes sense to set aside loans up front because what you definitely don't want to happen is two or three quarters after the acquisition, to set aside loans that are greater than your initial expectations."

Shanahan also says the conservative nature of Canadian banks often sees them set aside a lot of money in case loans go bad, only to see that worst-case scenario not come to pass.

"That was the case earlier in the pandemic when they set aside massive amounts of money for losses that never materialized," he said.

"They're not experiencing losses [but] typically the Canadian banks will set aside loans that are actually performing, and that speaks more to their outlook for the economy," he said.

BMO's profits took a big tumble to just over $1 billion during the quarter, well down from $4.7 billion a year ago, mostly due to costs associated with the $16-billion acquisition mentioned above. But even on an adjusted basis, the bank's profit came in at $2.2 billion, or $2.93 per share.

That's down from $3.23 last year and less than the $3.21 that analysts were expecting.

Shares in both lenders were down in early trading following the release of the numbers, but the news wasn't all bad for investors. Both banks saw fit to increase their quarterly dividend to shareholders, a sign they are confident in their outlook.

BMO upped its quarterly payout by four cents to $1.47 per share, while Scotia hiked by three cents to $1.06.