Increased provisions for bad loans reflect economic strain
In the latest financial quarter, the Bank of Montreal (BMO) and Scotiabank felt the sting of a tough economic climate, with rising loan delinquencies denting their earnings.
Amid a backdrop of increasing interest rates, both banks have ramped up their safety nets for bad loans, reflecting the growing financial stress on consumers and businesses alike.
While Scotiabank managed to beat expectations, thanks in part to its diverse operations, BMO fell short, with declines in key areas like capital markets, insurance, and corporate services taking a toll. The numbers tell the story: Scotiabank set aside $962 million for credit losses, overshooting analyst predictions, and BMO earmarked $627 million, much more than the anticipated $514.2 million.
The reasons behind these provisions vary between the two banks. Scotiabank cited increased impaired provisions due to challenges in its international business, Canadian auto loans, and unsecured lines of credit. Meanwhile, BMO pointed to higher provisions for consumer loans, credit cards, and loans to businesses and governments.
"Higher delinquencies across most of our retail portfolios this quarter reflect the challenging macroeconomic environment," Scotiabank chief risk officer Phil Thomas said in a conference call with analysts. Likewise, BMO chief risk officer Piyush Agrawal attributed the uptick in impaired loan provisions to the tighter monetary policy's ongoing impact, noting significant increases in delinquencies for credit cards and personal loans.
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Still, leadership at both banks remains optimistic about their Canadian clients' ability to navigate the credit landscape. Many households still have savings and have cut back on non-essential spending, they noted.
The market response was mixed, with BMO shares dipping 3.8% to $121.97, marking a significant downturn, while Scotiabank shares saw a 3% rise to $48.69.
The issue of long-term mortgages has become more pronounced with rising interest rates. Many borrowers, especially those with variable-rate mortgages, find themselves in a bind, unable to chip away at their loan's principal and facing the prospect of much higher payments upon renewal. BMO has reported a decrease in negatively amortizing mortgage holders, from 32.4% to 24.7% of its mortgage book. Although Scotiabank doesn’t offer such mortgages, it noted its variable-rate mortgage customers have seen their monthly payments jump by more than 50% since early 2022, when the Bank of Canada began raising rates.
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