A Canadian flag flies in the Bay Street financial district in Toronto on Aug. 5, 2022.Nathan Denette/The Canadian Press
Bank of Montreal BMO-T and Bank of Nova Scotia BNS-T are setting aside provisions for potential loan losses to mitigate the threat of tariffs and escalating tensions with the United States as clients start to press pause on borrowing and investment.
In December, Canada’s largest lenders said that higher-for-longer interest rates, along with geopolitical tensions, boosted risks in their client portfolios. The growing threat of a trade war has escalated these threats.
While both banks said Tuesday that it is premature to assume the severity or duration of a looming trade dispute, they considered potential developments when determining their provisions for credit losses.
On Tuesday, Scotiabank and BMO reported earnings for their first quarter ended Jan. 31, which means that the banks’ assessments do not include President Donald Trump’s plethora of executive orders and updated tariff proposals issued by the U.S. in February.
Scotiabank’s assessment included the risk of the U.S. levying a 5-per-cent tariff on half of Canadian imports and 10 per cent on half of Mexican imports, chief risk officer Phil Thomas said during a conference call with analysts.
Based on the bank’s models that use economic forecasting to predict future losses, Scotiabank set aside $1.2-billion in provisions for credit losses – the funds banks allocate to cover loans that may default. That was slightly higher than analysts anticipated.
The bank reserved $98-million for risky loans that are still being repaid, which increased from the previous quarter, largely driven by the inclusion of potential tariffs and macroeconomic volatility in its Canadian and Mexican businesses.
Mr. Thomas said it is difficult to provide a more concrete outlook and set aside a bigger block of provisions without knowing the duration of the tariffs, the degree of retaliation, the amount of government subsidies and client actions to mitigate the impact.
“It’s really hard to give you a range or an outcome at this point in time without having some understanding of what these tariffs look like,” Mr. Thomas said. “If tariffs come along in [the second quarter], we’ll do the appropriate build, and it’ll be a sizable but manageable build.”
BMO set aside $1.01-billion in provisions – slightly lower than analysts anticipated. The bank included $152-million against loans that are still being repaid, which is partly based on the impact of the uncertain economic environment, including potential tariffs.
“Given the pronouncements coming out of the U.S. administration, we felt it was prudent to consider the sensitivities in the environment as a result of the tariff threats,” BMO chief risk officer Piyush Agrawal said during a conference call.
“If tariffs are implemented as announced and remain in place for a prolonged period, all else being equal, we would expect that deterioration in the economic outlook to then become part of our economic assumptions in maybe the second quarter or whenever that gets implemented. But, as of now, I feel very good about where we landed.”
While Mr. Trump delayed implementing his proposed tariffs on Canada and Mexico until March, the mounting uncertainty is putting pressure on the banks’ clients and tempering demand for loans.
“As we’ve been going out speaking to clients, we get a sense people are sort of holding their powder dry and people are waiting to see what’s going to happen,” Mr. Thomas said. “It’s causing people to sort of pause and think about what they’re going to do.”
The U.S. makes up more than half of BMO’s commercial banking portfolio, and the lender is seeing a difference in sentiment between American and Canadian clients.
U.S. commercial clients are more optimistic about the state of the economy, while their Canadian counterparts are easing up on investment and acquisition activity. But they are also trying to plan for potential tariffs by looking at different business models, creating contingency plans, and looking at their inventory and supply chain management, BMO’s head of commercial banking Nadim Hirji said during a conference call.
“Not everyone is going to be impacted equally,” Mr. Hirji said. “Until we have more clarity, I do expect loan demand to slow, but I do believe our North American footprint will be advantageous to us.”
Scotiabank and BMO reported first-quarter profits that beat analyst expectations Tuesday.
BMO’s net income surged 65 per cent to $2.14-billion as capital markets and wealth management activity surged. Adjusted to exclude certain items, the bank said it earned $3.04 per share, topping the $2.41 per share analysts expected, according to Refinitiv.
Scotiabank posted $993-million in profit, a 55-per-cent drop from the same quarter a year prior. On an adjusted basis, including impairment costs related to the sale of certain banking operations in Latin America, the bank’s profit climbed 7 per cent from a year prior to $2.4-billion, or $1.76 per share. That edged out the $1.65 per share analysts expected, according to Refinitiv.
As part of its strategic turnaround plan, Scotiabank has been reallocating capital from its businesses in Latin America to Canada and the U.S. In January, the bank announced that it is selling its operations in Colombia, Costa Rica and Panama to Colombian bank Davivienda. The sale resulted in an impairment cost of $1.4-billion, which weighed heavily on the bank’s reported net income.
The bank also completed its acquisition of a 14.9-per-cent stake in U.S.-based bank KeyCorp in December. The deal contributed approximately 2 cents to Scotiabank’s earnings per share this quarter.
Capital markets profit at both banks soared on a boost in trading revenue driven by market volatility in the aftermath of the U.S. presidential election last November.
Scotiabank also benefited from the Bank of Canada cutting its policy interest rate, as that reduces the lender’s cost of funding. The lender has been building its base of “primary” customers – clients that have a daily chequing account as well as another payment or investment product – to lower its funding costs.
National Bank of Canada will post earnings on Wednesday. Royal Bank of Canada, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce will close out the week for major bank earnings on Thursday.