Two of Canada’s big banks reported first-quarter (Q1) results Tuesday that were higher than expected, but the earnings were driven by potentially unstable trading revenues as slowing loan growth and rock-bottom interest rates offset gains.
Toronto-based Bank of Montreal (BMO) reported net income of $1.49 billion, up 39% from a year ago. After adjustments, the profit amounted to $2.28 per share, beating analyst expectations of $1.88 per share by a wide margin, according to data compiled by Thomson Reuters.
Bank of Nova Scotia, which also reported Tuesday, had $2.01 billion of net income during the first quarter, up 10% compared to the same period last year. On an adjusted basis, the Toronto-based bank had $1.58 of earnings per diluted share, just one penny higher than analyst estimates.
While the headline figures may seem strong, Edward Jones analyst Jim Shanahan cautioned that income from trading and other capital markets activities provided much of the boost.
That’s potentially problematic because trading activities are generally not considered reliable sources of earnings growth, Shanahan said.
“Fee income can be volatile,” he said.
Trading activity was robust during the quarter as the election of President Donald Trump created expectations of greater economic growth in the U.S.
“But that may not be the case next quarter, or for the balance of the year,” Shanahan said.
Net-interest income at the banks — the profit generated from loans — felt the weight of low interest rates and stunting consumer loan growth.
“With the lower interest rate environment that we’re in there’s still continuous downward pressure,” Scotiabank chief financial officer Sean McGuckin said during an interview.
Debt-laden consumers have begun tapping out at a time when Canadian household debt has hit record highs. Statistics Canada reported in December that the ratio of household credit market debt to adjusted disposable income climbed to 166.9% in the third quarter — up from 166.4% in the previous quarter.
“You can either grow net-interest income by growing your loan portfolio or generating higher margins,” Shanahan said. “There’s no loan growth, and margin growth is hard to achieve when interest rates are as low as they are.”
Going forward, McGuckin said the bank expects Canadian consumer loan growth to be in the mid-single digits.
“We’ve had outsized retail growth two years, three years, four years, five years ago, as an industry,” he said. “Now you’ll see us grow a bit more in line with the nominal GDP outlook for the country.”
Shares of Scotiabank on the S&P/TSX composite index were down 2.3%, or $1.80, in late afternoon trading to $77.45. BMO climbed 2%, or $1.98, to $100.56.
Canadian Imperial Bank of Commerce and Royal Bank of Canada which both reported last week, also beat analyst expectations. Toronto-Dominion Bank will wrap up the banks’ earnings season Thursday.
Read: Bright outlook for Canada’s Big Six banks
BMO also reported $5.41 billion of revenue, up from $5.08 billion a year ago. Scotiabank increased its revenue to $6.87 billion from $6.37 billion during the first period of last year.
Scotiabank also increased its quarterly dividend by 2¢ to 76¢ per share, while BMO announced plans to return capital to shareholders by buying back 15 million of its shares.
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