TORONTO — The threat and uncertainty around tariffs is creating a chill on borrowing and business activity, said Scotiabank and BMO as they kicked off first quarter bank earnings Tuesday.
The banks both still managed to beat analyst expectations for the quarter ending Jan. 31, thanks in part to a spike in trading revenue from the volatility ushered in by the U.S. election.
Earnings also weren't weighed down by the threat of tariffs causing them to set aside more money for potentially bad loans, because they said there's too little to go on to make those adjustments yet.
"It's difficult to act on headlines and tweets," said Scotiabank chief risk officer Phil Thomas on an analyst call.
U.S. President Donald Trump said on Monday he intends to go ahead with tariffs against Canada on March 4, but he also said he'd implement them in early February.
The uncertainty is leading to a slowdown in activity including in areas like investment plans, mergers and acquisitions, and borrowing.
BMO chief executive Darryl White said it's hard to plan ahead when so much has shifted, even since Feb. 1 when Trump imposed tariffs only to pause them just before they were set to be implemented on Feb. 4.
"It's frustrating for a lot of people," said White.
"We're only 24 days into this, and the shelf life of any prediction within those 24 days has been, you know, worth about 24 hours. So it's difficult to figure out where all this lands."
He said some clients are effectively hitting the pause button on some commercial activity as they wait for clarity.
"The anxiety levels are a little bit higher in Canada than they are in the U.S., but that's not to say there aren't anxiety levels in the U.S. as well," said White.
It's something Scotiabank is also seeing, said Thomas.
"Whether it's on the retail side, the corporate side, the commercial side, you see a bit of a stasis right now. And so it's causing people to sort of pause and think about what they're going to do."
The banks said that while they hadn't yet made significant adjustments to provisions for credit losses from the threat, they have the capital buffers to do so and will respond when firm policies come into place.
"If tariffs come along in Q2, we'll do the appropriate build in Q2. It'll be a sizable but manageable build and you know, we'll work through it," said Thomas.
Scotiabank did add $132 million to its provisions from the previous quarter to bring its total to $1.16 billion, with the add in part from its Canadian banking division and a more cautious consumer outlook.
BMO's provisions totalled $1.01 billion, down from the $1.52 billion in the fourth quarter thanks to a drop in its U.S. and capital markets divisions, while its Canadian provisions rose.
The banks also have large capital buffers, including Scotiabank at 12.9 per cent and BMO at 13.6 per cent, well above the regulatory minimum of 11.5 per cent.
Both signalled that despite the sizable reserves, they'll be hesitant to ramp up shareholder payouts because of the uncertainty.
Scotiabank said it'd be cautious about returning capital to shareholders, but it expects to resume modest dividend growth next quarter and hopes to start share buybacks by the end of the year.
BMO said it would likely allow its capital ratio to move higher rather than pick up the pace of share buybacks.
The banks have built up reserves as they both reported adjusted profits that were up from a year ago.
BMO Financial Group says it earned $2.14 billion in its first quarter, up from $1.29 billion in the same quarter last year, helped by strength in its wealth management and capital markets businesses.
Scotiabank reported a net income of $993 million, down from $2.2 billion last year because of a $1.36 billion charge related to the sale of its business in Colombia, Costa Rica and Panama.
Adjusted, BMO reported earnings of $3.04 per share in its latest quarter, up from an adjusted profit of $2.56 per share a year earlier.
Analysts on average had expected BMO to earn an adjusted profit of $2.41 per share, according to according to LSEG Data & Analytics.
Scotiabank's adjusted earnings worked out to $1.76 per share, up from an adjusted profit of $1.69 per share a year earlier and ahead of analyst expectations of $1.65 per share.
Jeffries analyst John Aiken said in a note that the two banks kicked off earnings with solid results boosted by good credit performance, heightened capital markets activity and the tailwind of the low Canadian dollar boosting earnings from abroad.
He said the trends could set up a good quarter for the sector as other banks report later this week, but the question of tariffs remains.
"The outlook remains one of caution, as the overhang of U.S. tariffs resonated during the respective earning calls."
Both banks said they've run through numerous scenarios on how tariffs might affect earnings going forward, but for now it's wait and see.
"There's going to be a number of variables that we're going to work through, the size and duration of the tariffs, the degree of retaliation, the amount of government subsidies, client actions, bank actions," said Scotiabank's Thomas.
"It's really hard to give you a range or an outcome at this point in time without having some understanding of what these tariffs look like."
This report by The Canadian Press was first published Feb. 25, 2025.
Companies in this story: (TSX:BMO, TSX:BNS)
Ian Bickis, The Canadian Press
