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Canadian recession is likely without fiscal stimulus: Scotiabank


Canada is likely to fall into a recession this year unless the government moves ahead with robust fiscal stimulus as the economy takes a double hit from the coronavirus and tanking oil prices, according to the Bank of Nova Scotia.

Scotiabank is the first of the six largest Canadian banks to predict the country could be headed into a recession, though it believes the government will move quickly enough to avert one. A rapid rise in coronavirus cases globally, the sharp fall in oil prices and volatility in financial markets make a contraction in the second and third quarters this year “likely” in the absence of fiscal measures, Jean-François Perrault, chief economist at Scotiabank, said Wednesday.

“A reasonably mild recession appears likely unless timely and targeted fiscal measures are deployed in the very near future to deal with the economic impacts of the virus,” Perrault wrote in a research note.

Prime Minister Justin Trudeau released $1.1 billion in new funding earlier Wednesday in response to the virus, and said the government is ready to do more if necessary. Trudeau also said his government is prepared to use federal financing agencies to further stimulate the economy if needed, a measure that was deployed during the 2008-09 financial crisis.

But that may not be enough. Canada’s measures pale in comparison to those set out by countries such as Italy, which plans to spend as much as 25 billion euros ($28.3 billion) on stimulus measures. Perrault recommends the government roll out a fiscal package equivalent to one per cent of GDP, or just over $20 billion, in order to prevent the Canadian economy from going into recession.

The Toronto-based bank sees the country’s gross domestic product growth slowing to 0.3 per cent for the year in the absence of significant stimulus. Scotiabank’s isn’t the first bearish call to emerge this week in the aftermath of the oil price collapse but it does represent the most aggressive take yet on Canada’s future.

National Bank of Canada Financial and Royal Bank of Canada will release their forecasts later this week. Bank of Montreal was the first of the six banks to revise their forecasts lower this week, with a call for full year GDP growth at 0.5 per cent.

The latest stream of downward revisions include predictions that the Bank of Canada will cut rates to 0.25 per cent by June from its current 1.25 per cent. That’s in line with financial market expectations, according to overnight index swaps trading. The last time the Bank of Canada policy rate reached 0.25 per cent was in 2009. Earlier this month, the central bank cut interest rates by 50 basis points amid escalating coronavirus concerns, matching an emergency move by the Federal Reserve.

Here are the latest revisions from bank economists this week:

Scotiabank — Jean-François Perrault

Sees Canada’s 2020 GDP at 0.3 per cent in absence of substantial fiscal stimulus and 0.7 per cent if there is fiscal stimulus worth one per cent of GDP. Without fiscal stimulus, Q2 and Q3 GDP will contract. Expects the Bank of Canada to cut interest rates by 50 basis points at the next two meetings.

Bank of Montreal — Michael Gregory

Lowers 2020 GDP to 0.5 per cent from one per cent, and sees Q2 contracting by 3.5 per cent. Expects Bank of Canada to cut rates by 100 basis points over the next two meetings to 0.25 per cent.

JPMorgan — Silvana Dimino

Revises down 2020 forecast to one per cent or 1.1 per cent Q4/Q4 basis. Predicts no growth in Q2 and a two per cent rebound in Q3. Expects Bank of Canada to cut by 50 basis points in April with the “heightened risk” for an earlier emergency cut to zero per cent.

Goldman Sachs — Daan Struyven

Revises down 2020 GDP to 0.4 per cent or 0.2 per cent on a Q4/Q4 basis. Sees Canada on “verge of recession” with a zero per cent Q1, -0.5 per cent Q2, 0.25 per cent Q3 and one per cent Q4. Expects Bank of Canada to lower policy rate to 0.25 per cent by its June meeting.

 — With assistance from Erik Hertzberg and Kait Bolongaro

Bloomberg.com



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Bank of Montreal hikes dividend but takes hit for job cuts


The chief executive of the Bank of Montreal vowed Tuesday that there will be “ongoing accountability” in the wake of another restructuring charge that the Canadian lender was forced to take in connection with job cuts.

BMO reported on Tuesday net income of nearly $1.2 billion for the three months ended Oct. 31, down from about $1.7 billion a year earlier, due in part to a $484-million pre-tax restructuring charge that Canada’s fourth-largest lender took for the quarter.

The fourth-quarter charge was tied to severance and some small real estate-related costs, BMO said, “to continue to improve our efficiency, including accelerating delivery against key bank-wide initiatives focused on digitization, organizational redesign and simplification of the way we do business.”

BMO CEO Darryl White told analysts during a conference call that the decision was made “with serious consideration,” and was in line with its strategy.

“All areas of the bank contributed to the charge, and there will be ongoing accountability throughout the organization for the decisions that have been made,” White said.

BMO’s chief financial officer, Tom Flynn, said the restructuring charge would affect around five per cent of the bank’s employees. He added that they expect their measures to create savings of approximately $200 million in its fiscal 2020 and to achieve run-rate savings of about $375 million by the first quarter of fiscal 2021.

The comments came after the Toronto-based bank also reported it had cut the number of full-time equivalent employees by 810 from the previous quarter, to 45,513 total for the period ending Oct. 31.

However, the restructuring costs have been a recurring theme for BMO, which recorded similar charges in recent years, including hits of $260 million in 2018 and $59 million in 2017. There was also a $120-million severance expense for the second quarter of 2019, which was attributed to the bank’s capital-markets unit.

“It is difficult for us to credit good expense control in the face of yet another restructuring charge from this bank, this time approaching $500 million,” CIBC World Markets analyst Robert Sedran wrote in a note. “However, the underlying segment performance was solid with improving volume growth, positive operating leverage, and stable credit quality. A decent result.”

White, though, suggested that the restructuring costs could be coming to an end.

One of BMO’s key targets has to do with what is known as its efficiency ratio, which is a percentage calculated as non-interest expense divided by total revenue. BMO’s adjusted efficiency ratio was 60 per cent for the quarter, down from 62.2 per cent a year ago, but the bank has set the goal of achieving 58 per cent by 2021.

White said that the latest charge would help BMO in reaching its efficiency target, “while continuing to optimize efficiency beyond that without the need for additional charges.”

In response to an analyst question, the CEO noted it was a “sizable move” affecting five per cent of the bank’s workforce, that the bank was “holding the line a lot more tightly” on expense growth and that the discipline they expect from managers going forward does not include a “reliance on this technique and the assist of a charge.”

“And so that’s a very sort of clear message to the entire organization in terms of how we expect to manage ourselves going forward,” White said. “So when I put all those together, in addition to the real benefits that we’re starting to see from technology and digitization, we’re confident in telling you that we’ll retire this play from our playbook.”

Affecting BMO’s latest results as well were some acquisition-related assets and costs and a $25-million reinsurance “adjustment” connected to the impact of claims from Japanese typhoons, which hit the bank after its previously announced decision to wind down the reinsurance business.

With the latest restructuring charge removed, BMO’s profit for the quarter was $1.6 billion, up five per cent from the same three months of 2018. Adjusted earnings per share were $2.43, an increase of five per cent and slightly above the $2.41 that analysts were expecting.

The bank said its results were boosted by good showings from its retail businesses and greater earnings out of its wealth management unit, offset somewhat by a drop in net income from its capital-markets operations. The previous year’s results also included a “favourable tax item” in the U.S.

BMO’s stock price fell Tuesday morning, and was around 2.5 per cent lower as of 10 a.m., at $98.22.

“We do not expect the slight beat to drive the stock; however, the news on the restructuring charge is likely to drive some near term upside in BMO shares given our expectation that management will suggest that this restructuring positions the bank well to deliver on its 58 per cent efficiency ratio target for 2021,” Eight Capital analyst Steve Theriault wrote.

For its fiscal 2019, which wrapped up at the end of October, BMO reported earnings of almost $5.8 billion, up six per cent from the previous year.

In addition to the earnings, BMO announced it was hiking its quarterly dividend payment by three cents to $1.06 per common share.

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