TORONTO: Bank of Montreal and Bank of Nova Scotia (Scotiabank) beat estimates for first-quarter profit on Tuesday as they set aside less-than-expected capital to cover bad loans, and said economic recoveries driven by the rollout of coronavirus vaccines will boost performance into the year.

Both banks also returned to pre-pandemic profit levels as they posted higher earnings from a year earlier driven by strong growth in capital markets and wealth management. This helped offset more muted increases in their Canadian units and a decline in Scotiabank's international business.

BMO shares rose 2.8% to C$104.68 in morning trading in Toronto, on track for their highest close since May 2019. Scotiabank shares increased 2.7% to C$74.01, heading for their best day in over a year. The Toronto stock benchmark lost 0.8%.

Canada's third- and fourth-biggest lenders, which, like the rest of the industry, have so far avoided a jump in pandemic-driven bad loans thanks to a raft of assistance measures, were optimistic about the rest of 2021.

BMO executives expressed surprise about the resilience of its clients and their ability to "cobble together" enough revenues to break even, citing this as a driver of low loss rates, enabling it to claw back some provisions on performing loans from previous quarters.

"While uncertainty remains in terms of the future path of the pandemic, assuming progress continues to be made with vaccination in our key markets ... we would expect further releases from our performing provision in the coming quarters," Chief Risk Officer Patrick Cronin said on an analyst call.

BMO reported provisions for credit losses (PCL) of C$156 million, far below the average analyst estimate of C$413 million. Scotiabank took PCLs of C$764 million, compared with the expected C$928 million.

Although many of Scotiabank's Latin American markets saw the hit of the pandemic later than North America, it too cited a "favorable macroeconomic outlook" as a driver of lower provisions for credit losses, particularly overseas.

The bank, which saw bad loans climb in some overseas markets, notably Peru, has enough reserves to cover expected increases in impaired loans in the second and third quarters, its executives said on a call.

The lender expects a 29% increase in profit in its international division to C$500 million by the fourth quarter as business conditions and net interest margins (NIM) improve, they said.

The NIM recovery is already underway, with a 6 basis-point increase in Canada and 17 in the United States, following several quarters of stagnation. Scotiabank's international banking NIM also rose 6 basis points, although it was flat in Canada.

BMO reported adjusted income of C$3.06 a share versus analyst expectations of C$2.05. Scotiabank's was C$1.88, compared with estimates of C$1.57.