May 27, 2008 / 10:35 PM / in 9 years

Canada bank profits soften as provisions rise

TORONTO (Reuters) - Two of Canada’s Big Six chartered banks kicked off the spring quarterly earnings season on Tuesday by revealing lower profits and higher provisions for credit losses.

Neither development was unexpected -- analysts had flagged weakness in Canadian banks’ capital markets-related businesses and rising loan-loss provisions as concerns months ago.

But Bank of Montreal said its provisions for credit losses would climb higher than it had anticipated less than three months ago, while Bank of Nova Scotia said it was unlikely to meet its 2008 earnings growth target of 7 percent to 10 percent.

Net income fell 3 percent at Bank of Montreal to C$642 million in the second quarter ended April 30, or C$1.25 a share. Its U.S. operations include Chicago-based Harris Bank.

Scotiabank, with greater international operations than BMO, said net income fell 6 percent to C$980 million, or 97 Canadian cents a share.

Provisions for loan losses jumped at both banks.

“Yes, the credit environment is deteriorating, I‘m not terribly surprised by that,” Genuity Capital Markets analyst Mario Mendonca said.

“But BMO could very well be special in this regard,” he added.

That is because of BMO’s exposure to a U.S. commercial paper conduit called Fairway Finance Co, a BMO-sponsored entity that was originally an off-balance sheet vehicle.

“Over the last couple of quarters, they’ve put about C$900 million of those (Fairway) assets back on balance sheet, a good portion of which are already impaired,” Mendonca said. That is sharply pushing up BMO’s provisions for credit losses, and its gross impaired loans, he said.

For other Canadian banks, which are due to report results later this week, Mendonca said he expects provisions for credit losses, or PCLs, to grow in the order of 50 percent to 60 percent, a slower pace than at Bank of Montreal.

“I don’t think we’re going to see quite the screaming higher PCLs that we got for BMO this quarter.”

Still, the results at BMO and Scotiabank point to what can be expected from the other Canadian banks, DBRS analyst Brenda Lum told Reuters.

“I think there should be similar themes, with respect to the strength of the domestic businesses, higher provisioning (for loan losses) and continued weak capital markets,” she said.

The banks should also show that they have cut down on expenses, given that they all expected business to slow in response to the economic and market environment, she said.

“All in all, I think that the expense management was pretty good,” Lum said of Scotiabank and BMO.

Shares of both banks fell on the Toronto Stock Exchange, with Bank of Montreal losing 2.5 percent to close at C$47.76, and Bank of Nova Scotia slipping 1.1 percent to C$47.65.

Toronto-Dominion Bank comes up next in the earnings parade, and the remaining three -- Royal Bank of Canada, Canadian Imperial Bank of Commerce and National Bank of Canada -- will release their numbers on Thursday.

RBC has already announced second-quarter writedowns of about C$855 million in various portfolios that have suffered from the credit crunch, while analysts say CIBC could take charges of C$1.5 billion or so.

($1=$0.99 Canadian)

Reporting by Lynne Olver; editing by Rob Wilson

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