TORONTO — Weakening economic conditions weighed on Canadian banks as they began to report second quarter results Wednesday.
Both BMO Financial Group and Bank of Nova Scotia reported higher expenses, more money set aside for bad loans, and slowing loan growth in Canada that led both to earn less than they did a year ago and fall short of analysts’ expectations.
BMO chief executive Darryl White characterized it as a “shifting environment” that is putting pressure on revenue growth.
“The impact of persistent inflation, rising rates, a slowing global economy and an increasing deposit competition on the industry has accelerated. We’re not immune to these market forces,” he said on an analyst call.
His comments came as the bank reported a profit of $1.06 billion, down 78% from a profit of $4.76 billion a year ago, due in part to adjustments related to its deal to buy Bank of the West. Revenue for the quarter totalled $8.44 billion, down from $9.32 billion last year.
Scotiabank chief executive Scott Thomson said the quarter was marked by “challenging market conditions” as the bank reported net income down 21% from a year earlier to $2.16 billion. Scotiabank’s revenue totalled $7.93 billion, down from $7.94 billion in the same quarter last year.
The results came after a quarter marked by turmoil in the U.S. banking system as several major banks, starting with Silicon Valley Bank, became unstable enough for regulators to force a sale.
The banking crisis was created in part by rapidly rising interest rates that have also put pressure on households carrying mortgages, but clients are so far largely managing to keep up with payments, the banks said.
“Our customers are managing through this period of heightened interest rates by making trade-offs,” said Scotiabank chief risk officer Phil Thomas on an earnings call.
“For example, discretionary spending such as retail spending and entertainment is down 10 per cent year-over-year for our variable rate customers.”
He said delinquency rates on loans are trending up modestly and that the bank expects provisions for bad loans to stay elevated for the year but that he’s comfortable with how the bank is positioned for the economic cycles ahead.
Borrowers are leaning on savings accumulated during the pandemic to make higher loan payments, said Thomas.
“They have been drawing down on that payment buffer. They still have more deposits in their account than they did pre-pandemic, but we’re starting to see those deposits run off as payment levels increase.”
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