Canada's BMO, Scotiabank warn of muted growth at home until rate cuts

By Nivedita Balu and Niket Nishant

(Reuters) -Bank of Montreal and Bank of Nova Scotia, two of the biggest banks in Canada, on Tuesday warned of muted growth at home until the central bank begins lowering sky-high interest rates, a situation that has forced lenders to set aside big rainy day funds.

BMO missed analysts' estimates for quarterly profit as it set aside larger-than-expected bad loan provisions but peer Scotiabank beat profit estimates as it earned more on loans due to high interest rates.

BMO shares sunk 5.5% in early trading in Toronto, while those of Scotiabank rose 2.7%.

"We expect North American economic growth to remain subdued in the first half of this year before recovering towards the end of the year on the back of lower interest rates," BMO CEO Darryl White told analysts.

Economists expect the Bank of Canada to wait until at least June to cut its key interest rate, after increasing it by 475 basis points since 2022, impacting consumer sentiment and spending.

In Canada, where big banks dominate the market in lending and personal banking, households have borrowed heavily to buy real estate but face challenges in repaying loans amid higher costs of living.

While higher interest rates have slowed demand for credit, they help bring in more money for banks through their lending activities.

Scotiabank has benefited from its international banking business in parts of Latin America and South America, where central banks have begun to cut rates.

Still, CEO Scott Thomson warned that the Canadian economy would underperform the economies in both the United States and Latin America but expects some "growth reacceleration" in response to policy easing and more active residential real estate markets.

The bank said it expects net interest margin for the Canadian banking segment to be muted.

BMO, which brings in about a third of its income from the United States and nearly half from Canada, said that although the rates are expected to pressure consumers renewing their mortgages, they have the capacity to absorb higher payments.

BMO reported adjusted earnings of C$2.56 per share, compared with analysts' estimate of C$3.02, according to LSEG data. Scotiabank's earnings of C$1.69 beat estimates by 8 Canadian cents.

Scotiabank said net interest income (NII), the difference between the interest banks earn on loans and pay out on deposits, rose 4.6%, while at BMO it rose 17%, benefiting from the acquisition of Bank of the West.

Jefferies analyst John Aiken said Scotiabank saw "solid performance on its cost controls" but noted that both its Canada and International units saw declines in their loan portfolios while impaired loans grew.

At BMO, provisions for credit losses (PCLs) grew nearly three-fold, offsetting gains from higher NII. Scotiabank's reserves surged about 51%.

The banks have been looking for growth outside of the saturated Canadian market, with BMO making a $16 billion purchase of U.S. regional lender Bank of the West and Scotiabank targeting North America's $1.6 trillion trade through Mexico.

BMO said it was also impacted by a C$313 million special assessment fee by the U.S. Federal Deposit Insurance Corporation and C$136 million in losses from the sale of its recreational vehicle loans portfolio.

The FDIC has charged banks a fee to replenish its deposit insurance fund, which was drained of $16 billion by the collapse of Silicon Valley Bank and Signature Bank in the United States last year.

RBC Capital Markets analyst Darko Mihelic noted that all segments at BMO disclosed earnings that were lower than estimated, with a "lot of noise in the quarter."

($1 = 1.3507 Canadian dollars)

(Reporting by Niket Nishant and Pritam Biswas in Bengaluru and Nivedita Balu in Toronto; Editing by Shinjini Ganguli and Mark Porter)