Bank of Nova Scotia and Bank of Montreal, Canada’s third- and fourth-largest lenders, got a boost last quarter as the nation’s businesses increased borrowing to meet customer demand.
Commercial loan balances at Scotiabank’s domestic banking unit surged 19% to C$72.7 million ($56.6 million) and gained 13% to C$96.2 million in Bank of Montreal’s Canadian business in the three months through April. Fiscal second-quarter profit at both lenders topped analysts’ estimates.
While the economic outlook has softened amid expectations for continued interest rate increases, preliminary figures suggest Canada’s economic growth at the start of the year
“You had quite a bit of reopening and a lot of consumer demand in the quarter, so businesses are working to produce more,” Paul Gulberg, an analyst at Bloomberg Intelligence, said in an interview. “Businesses are also staring down the interest-rate increases that are coming, so they’re borrowing more now to lock in at lower rates.”
Those central bank interest rate increases, meant to cool surging inflation, are already giving the banks a boost in profitability. Scotiabank’s net interest margin — the difference in what it earns on loans versus what it pays for deposits — widened to 2.23% in the fiscal second quarter from 2.16% in the first quarter. Bank of Montreal’s net interest margin on average earning assets expanded to 1.69% from 1.64% in the first quarter.
Interest rate hikes gave an even more pronounced lift to results in Scotiabank’s Latin America-focused international business. The unit’s net interest margin widened to 3.86% from 3.76% in the first quarter.
International operations
Scotiabank Chief Executive Officer Brian Porter has revamped the international unit by focusing on larger, more profitable markets and selling off smaller, underperforming operations. The unit benefited last quarter from growth in mortgages and commercial loans. Net income in the international segment surged 44% to C$605 million, benefiting from growth in commercial loans and mortgages.
Bank of Montreal’s U.S. business, which the lender is expanding with the $16.3 billion acquisition of Bank of the West, saw the benefit of the commercial-lending expansion as well. Commercial loans there rose 9.4% to $85.7 million.
The business is slated to get a further boost, becoming North America’s fourth-largest commercial bank when Bank of Montreal’s purchase of San Francisco-based Bank of the West from BNP Paribas is completed late this year. Bank of Montreal reiterated that it expects the deal to close by the end of 2022.
