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BMO, Scotiabank build loan loss reserves as economic uncertainty rises

By Manya Saini and Nivedita Balu

(Reuters) - Bank of Montreal and Bank of Nova Scotia stockpiled rainy-day funds and reported a fall in first-quarter profit on Tuesday, as the Canadian lenders prepare for customers slipping on payments amid rising concerns of a recession.

Shares in Scotiabank dropped 5% in morning trading in Toronto, while BMO was down 1.7%.

On an adjusted basis, BMO reported a profit of C$3.22 per share for the quarter, compared with C$3.89 per share a year earlier. The bank, however, beat analysts' expectations of C$3.16, according to Refinitiv data, on the back of better-than-expected performance of its trading business.

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The lender also said the addition of the Bank of the West balance sheet, which it bought for $16.3 billion from France's BNP Paribas, is expected to widen its net interest margin by about 10 points for the second quarter and full year.

"BMO's quarter was good overall and it appears the Bank of the West acquisition will support incremental growth (in 2024 and 2025)," Canaccord Genuity analyst Scott Chan said.

Meanwhile, Scotiabank's newly appointed Chief Executive Officer Scott Thomson took a "cautiously optimistic stance" on the operating environment for this year, expecting to benefit from resilient employment and proactive monetary policies that are having the desired impact on inflation.

Scotiabank's net income, excluding one-off items, was C$1.85 per share for the quarter compared with C$2.15 a year earlier, missing analysts' expectation of C$2.03.

"It (BNS) was a low-quality quarter...the outlook is a bit more murky as well, especially near-term from the margin side and from a strategy perspective too with the new CEO," Chan said.

Canada's central bank has over the past 11 months lifted interest rates at a record pace to 4.5% in efforts to tame inflation, clouding the outlook for banks which typically thrive in strong economic backdrops.

High inflation and elevated rates are likely to stunt GDP growth in both U.S. and Canada, slowing the economy in the near term, BMO Chief Executive Darryl White said in a call with analysts.

Provision for credit losses at BMO was C$217 million ($158 million) for the quarter, compared with a recovery of C$99 million a year earlier.

Graphic: Provisions on the rise as economic outlook darkens https://www.reuters.com/graphics/CANADABANKS-PROVISIONS/CHART/myvmoaalwvr/chart.png

Scotiabank booked provisions of C$638 million, up from C$222 million a year earlier.

Profits at BMO and Scotiabank were also weighed down by the Canadian government's 'Canada Recovery Dividend' (CRD). The one-time 15% tax on domestically-generated profits over C$1 billion in the past two years was imposed last year on the country's banks and insurers.

BMO recorded C$371 million related to CRD and Scotiabank disclosed a hit of C$579 million.

($1 = 1.3581 Canadian dollars)

(Reporting by Manya Saini, Mehnaz Yasmin and Nivedita Balu in Bengaluru; Editing by Shailesh Kuber, Sriraj Kalluvila and Krishna Chandra Eluri)