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Feb 25, 2020

Scotiabank, Bank of Montreal earnings boosted by market surge

BMO, Scotiabank earnings beat expectations

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Improving markets gave Bank of Nova Scotia and Bank of Montreal a first-quarter profit boost, with the two Canadian financial giants reporting higher earnings in capital markets and wealth management.

Scotiabank’s capital-markets division posted a turnaround quarter, while earnings from global wealth management climbed as well. They were the Toronto-based company’s best-performing units in the three months through Jan. 31. Bank of Montreal benefited as well, with a 39 per cent surge in BMO Capital Markets earnings, helping counter a profit decline at the lender’s U.S. retail-banking unit.

The two companies join Royal Bank of Canada in posting first-quarter results Tuesday that topped analysts’ estimates, with improving markets and a better dealmaking environment bolstering market-sensitive businesses. Each of the three banks posted gains in trading revenue, echoing the advances at U.S. investment banks last quarter, while fees from underwriting and advisory surged.

Earnings at Scotiabank’s global banking and markets unit rose from a year earlier -- only the second quarter of profit growth in more than two years -- helped by higher revenue from fixed-income and equities trading and a 78 per cent jump in investment-banking fees. Wealth-management earnings, reported separately for the first time, climbed 12 per cent from a year earlier.

Those improvements helped offset declining profit from Scotiabank’s international-banking division, which was impacted by divestitures and higher provisions, and lower Canadian banking earnings.

‘Would Be Messy’

“We knew going in that with pre-announced charges, gains and the earnings drag from the sale of its stake in a Thai bank that the quarter would be messy,” CIBC analysts Robert Sedran and Christopher Bailey said in a note to clients. “The bank did not disappoint on that front, but nor did it disappoint on adjusted earnings as the surge in trading revenues we have seen elsewhere this quarter showed up for this bank as well and helped offset that earnings drag.”

Bank of Montreal’s capital-markets division surged 39 per cent to $356 million, with a 17 per cent jump in underwriting and advisory fees and trading revenue that was lifted by fixed-income products. That helped counter an earnings decline at the Toronto-based lender’s U.S. retail-banking division, which was hurt by higher loan-loss provisions.

Also in Scotiabank’s results:

-The lender has exited more than 20 countries in the past six years, scaling back in the Caribbean and Asia to focus on the Americas, with an emphasis on Mexico, Peru, Chile and Colombia. The international-banking division had C$582 million of profit, down 30 per cent from a year earlier. “As we continue to see improvement in the outlook for both Mexico and Chile, we expect international banking to have stronger results for the balance of the year,” Chief Executive Officer Brian Porter said on the company’s earnings call.

-Scotiabank told investors in January that it aims to get 40 per cent of its earnings from Canadian banking. The domestic-banking division reported profit of US$852 million in the first quarter, down one per cent from a year ago and accounting for 37 per cent of total earnings.

Also in Bank of Montreal’s results:

-Earnings at the company’s U.S. banking division, which includes Chicago-based BMO Harris Bank, fell 21 per cent to $351 million, after the bank set aside C$149 million for soured U.S. loans in the quarter. That’s more than double the amount in the fourth quarter and up from $6 million a year ago.

-Interest-rate reductions by the Federal Reserve last year pushed down the net interest margin at the U.S. banking division to 3.34 per cent, its lowest level in a decade.