WRAPUP 3-BMO, Scotiabank earnings beat as trade-related risks ease, shares surge

By Nivedita Balu, Ateev Bhandari and Pritam Biswas

Aug 26 (Reuters) - Bank of Montreal BMO.TO and Bank of Nova Scotia BNS.TO on Tuesday beat third-quarter earnings estimates as trade-related risks between Canada and the United States eased, but the lenders remained cautious.

Canada's third- and fourth-largest banks kicked off big bank earnings for the quarter that ended on July 31. They benefited from smaller-than-expected loan loss provisions, or money set aside to prepare for potential loan defaults, a key indicator of a lender's health.

BMO's shares were up 3% after hitting a record high of C$163.85, while Scotiabank stock rose 5.4% in Toronto, hitting its highest price since June 2022.

Canada and the U.S. have been holding talks on a new economic and security relationship for months. While U.S. President Donald Trump and Canadian Prime Minister Mark Carney have not reached a deal, Canada's economy has held up better than expected as most goods are entering the U.S. tariff-free under the U.S.-Mexico-Canada Agreement.

"Earlier this year, my uncertainty meter was very high, and today it's less high," BMO CEO Darryl White said.

"That doesn't mean there's no uncertainty ... but there's just a little less of it."

White, noting the final outcome on trade is unclear and geopolitical challenges persist, said most industries were USMCA-compliant and government programs would support the most-affected industries, limiting the negative impact.

Scotiabank, which has large exposure to Mexico and South America, said the lack of a new U.S.-Canada trade deal and mixed macroeconomic results continue to add uncertainty.

"We remain focused on navigating the macroeconomic environment in Mexico," the lender's Chief Risk Officer Phil Thomas said, adding that clients in the region were adjusting to the shifting trade dynamics.

One-tenth of Scotiabank's earnings comes from Mexico and another 10% from the United States as it focuses on the North America trade corridor. The U.S. makes up about one-third of BMO's income.

"The (earnings) results are encouraging, we are seeing tensions easing and there is optimism that there will be a trade deal coming soon," said Michael Dehal, senior portfolio manager at Dehal Investment Partners with Raymond James.

"I feel more confident today than I did last quarter when the banks reported."

BMO set aside C$797 million ($576.83 million) in loan loss provisions, compared with analysts' average estimate of C$948.5 million, according to LSEG data, helped by improvement in its U.S. commercial loan book. Scotiabank reported C$1.04 billion in provisions, also below analysts' C$1.19 billion estimate.

Canadian banks had increased loan loss provisions for the past few quarters to prepare for potential mortgage and credit card defaults in a high-interest rate environment, while businesses struggled to repay loans and reduced lending due to trade tensions.

BMO earned C$3.23 per share on an adjusted basis, beating analysts' estimate of C$2.95. Scotiabank earned C$1.88 per share, also above the average estimate of C$1.73.

($1 = 1.3817 Canadian dollars)