Earnings at Bank of Montreal and Bank of Nova Scotia were marred by increasingly cash-strapped consumers and businesses amid a challenging economic landscape.  

The two Toronto-based banks — the first of the big Canadian lenders to report fiscal first-quarter results — diverged in their results, with BMO missing estimates on lower capital-markets, insurance and corporate-services revenue and Scotiabank topping expectations. Still, both lenders set aside more money for potentially bad loans as higher interest rates continue to hurt credit quality, with missed payments beginning to mount.

Scotiabank’s provisions for credit losses rose to $962 million (US$713 million), more than the $922 million expected by analysts, while BMO’s provisions totaled $627 million, far more than the $514.2 million forecast.

Scotiabank pointed to higher impaired provisions in its international business as well as for Canadian auto loans and unsecured lines of credit, while BMO detailed an increase in impaired provisions for consumer loans, credit cards and business and government loans. 

“Higher delinquencies across most of our retail portfolios this quarter reflect the challenging macroeconomic environment,” Phil Thomas, Scotiabank’s chief risk officer, said on a conference call with analysts. 

His counterpart at BMO, Piyush Agrawal, said the ongoing impact of tighter monetary policy is to blame for an increase in impaired loan provisions.

“Consumer loan losses, in both Canada and the U.S., reflect higher delinquencies in credit cards and other personal loans, reflecting increases in customer insolvencies, which in Canada are now above pre-pandemic levels,” Agrawal said.

Still, executives at both lenders said they continue to see the credit situation as manageable for their Canadian clients, noting that many households still have savings to draw on and have trimmed their discretionary spending.

Clients whose mortgage payments have already gone up “are selectively choosing to prioritize those payments,” BMO Chief Financial Officer Tayfun Tuzun said in an interview. “That’s the reason why I think, in some segments, you are seeing higher card delinquencies, and spend levels are also declining.”

An eventual lowering of interest rates by both the Federal Reserve and the Bank of Canada as soon as this year should ease pressure on consumers, Tuzun said.

“But, in the meantime, we will probably be in this environment where delinquencies will be a bit higher,” he said.

BMO shares fell 4.6 per cent to $120.99 at 2:10 p.m. in Toronto after earlier slumping as much as 5.8 per cent, their biggest intraday decline since December 2022. Scotiabank shares climbed 3 per cent to $65.81.

On the mortgage front, soaring interest rates led to a wave of ultra-long home loans in Canada, hitting borrowers who have fixed monthly payments but variable interest rates. Many of those clients are no longer paying down any principal, extending the length of time it would take to repay their loans. When homeowners go to renew their mortgages, typically after five years, they are expected to face significantly higher payments.

BMO said Tuesday that clients with so-called negatively amortizing mortgages have dropped to 24.7 per cent of the bank’s book in the first quarter from 32.4 per cent a year earlier.

Scotiabank doesn’t allow for negatively amortizing mortgages, but said Tuesday that its customers with variable-rate home loans have already seen an average increase in monthly payments of more than 50 per cent since the Bank of Canada began its rate-hiking cycle in early 2022.