Canadian banks brace for uncertainty after mixed quarter

The Bank of Montreal (BMO) logo on one of its buildings on Bay Street in Toronto, Ontario, Canada, March 16, 2017. REUTERS/Chris Helgren/File Photo

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TORONTO, Aug 30 (Reuters) – Bank of Montreal (BMO.TO) (BMO) closed a mixed quarter for Canada’s largest banks on Tuesday as investors and analysts expected some earnings drivers to weaken and that economic uncertainties increase in the coming quarters.

BMO missed analysts’ estimates for third-quarter earnings and reported lower earnings from a year earlier as revenue from its capital markets business fell and provisions for credit losses rose.

Three of the six major Canadian banks fell short of expectations, in part because of difficulties in their operations in the financial markets. The other three beat expectations as loan growth remained strong and spreads rose. Read more

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“Overall, it was a strong quarter for banks, but we’re definitely seeing storm clouds brewing,” said Rob Colangelo, chief credit officer at Moody’s Investors Service.

The Big Six mostly beat analyst estimates in the final quarters of the pandemic on strong mortgage growth supported by a scorching housing market and robust trading and investment banking activity. The release of loan loss provisions made earlier in the pandemic also boosted earnings.

However, the tide seems to be turning, with investment banking fees depleting, funds under management dwindling and banks increasing provisions again as headwinds increase and costs and interest rates rise. weighs on consumers.

The Canadian Banks Index (.GSPTXBA) is down 2.8% since lenders began reporting results last Tuesday. The broader Toronto equity benchmark (.GSPTSE) lost 0.7%.

While some trading and business activity may return in the next few quarters, this is dependent on market recovery. Revenues for these companies, meanwhile, are expected to remain weak in the coming quarters, said Steve Belisle, portfolio manager at Manulife Investment Management.

New mortgage lending – another driver of growth – is also expected to run out of steam in the coming quarters.

“The business side could stay strong from here, but mortgages are about to go down due to the slowdown in activity we’re seeing in the housing market,” Belisle said.

The average house price in Canada has fallen more than 20% from its peak in February as sales fell.

While rising provisions for loan losses mean the likelihood of defaults taking banks by surprise is low, there could be an increase in borrower stress in a few years, as those who took out mortgages when Interest rates were at record highs should renew at the end of the typical five-year term at much higher rates, Colangelo said.

The pace of margin expansion could also slow, driven by lower long-term bond yields, said Philip Petursson, chief investment strategist at IG Wealth Management.

Many banks also predicted some slowdown in margin growth, attributing some of the third-quarter expansion to customers holding on to low-interest deposits instead of switching to term deposits.

The pace of moves toward higher-paying deposit products has been “slower than our expectations, but we expect them to pick up for future rate hikes,” BMO chief financial officer Tayfun Tuzu said. to reporters and analysts on a post-earnings call on Tuesday, echoing a similar statement from its counterpart at the Toronto-Dominion Bank (TD.TO) last week.

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Reporting by Nichola Saminather Editing by David Goodman

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