Aug 29, 2023
What are experts saying about earnings from BMO and Scotiabank?
BNN Bloomberg
,Correlation between bonds and the economy with BMO's Head of Fixed Income
The Bank of Montreal and the Bank of Nova Scotia have put aside more money in case their customers have trouble paying back their back loans in the months ahead.
Both banks revealed a rise in loan loss provisions in third-quarter earnings released on Tuesday and analysts are cautious of further credit risks ahead.
“Provisions for credit losses (PCLs) were higher than expected, including in International Banking, which highlights that Scotiabank (BNS) carries higher earnings-per-share (EPS) risk related to credit,” Paul Holden, analyst at CIBC, wrote in a note to clients on Tuesday.
He has a 12-month price target of $64 on shares of Scotiabank and neutral rating on the stock, which is equivalent to a hold. Scotiabank’s shares were trading at $62 as of Tuesday morning.
Holden noted that the primary risks he sees to the share price include a significant increase in loan loss provisions, prolonged capital market activity weakness, drastic changed in global interest rates and key personnel changes, among other factors.
BMO’s earnings per share of $3.12 after adjusting for severance and legal provisions was below consensus of $3.14, but above our estimate at $3.08,” Holden wrote in a note to clients.
He has a 12-month price target of $120 on shares of BMO and neutral rating on the stock. Scotiabank’s shares were trading at $114.07 as of Tuesday morning.
The primary risks to BMO’s price target is slower-than-expected commercial loan growth, Bank of the West integration risk, a significant increase in provisions for credit losses as well as prolonged capital market activity weakness, among other factors, Holden wrote.
RISING COSTS
Another challenge facing the Canadian banks this quarter has been rising costs – but the expenses will be a temporary challenge, according to one financial expert.
There are opportunities to cut front line staff as transactions turn digital, and a possibility to cut on the commercial corporate side, according to Mark McQueen, former president and chief executive officer at Wellington Financial LP.
“Investment banking, we know full well there’s 10 per cent layoffs whenever people can do that, and they you hire again when the market opens up and robust,” he told BNN Bloomberg in a television interview on Tuesday.
Layoffs are cyclical, and McQueen noted he’s seen this play out time and again in the last two decades.
“It won’t take that long, I don’t think, to get the cost base right again – and that will play into earnings next year,” he said.