BMO’s impaired energy loans rise nearly 60%

Bank ‘side steps’ concerns, posts $1.07B income

Bank of Montreal c ontinued to defy expectations by posting increasing yet still “modest” i mpaired energy l oans i n the first quarter, even as oil prices continue to bounce along at levels not seen in more than a decade.

Canada’s fourth- largest bank kicked off earnings week for the Big Five on Tuesday, posting net i n- come of $ 1.07 billion in the period ending Jan. 31, up nearly 7 per cent from a year earlier.

The recent acquisition of GE Capital’s U. S. transportation finance business and the strong U. S. dollar relative to the loonie contributed to earnings in the quarter, and BMO’s core cash earnings per share of $ 1.75 beat analyst expectations by four cents.

“The two concerns heading into the quarter, energy credit and capital markets, appear to have been sidestepped f or at l east one more quarter,” John Aiken, an analyst at Barclays Capital, told clients in a note.

“BMO came in ahead of expectations i n terms of earnings and, even though there was a modest deterioration in credit quality, the portfolio is holding and energy exposures did not generate much havoc.”

Impaired energy loans increased by almost 60 per cent from the previous quarter, rising to $ 162 million. But they “remain modest,” accounting for only 2.2 per cent of overall energy loans at the bank, Aiken said.

On a conference call, analysts pressed BMO executives about whether prolonged low oil prices and the expected fallout for companies and indebted consumers would create bigger problems – and losses – for the banks.

“There will be more provisions that will come our way,” acknowledged Surjit Rajpal, BMO’s chief financial officer. However, he cautioned that this downturn should not be compared directly to earlier sector troughs.

Among other reasons, the bank is more diversified than was the case in the 1980s, and the focus is now on sectors in North American that have “more asset cover” backing the loans, he said.

In addition, oil and gas companies have been “quicker to take action” than in other cycles to shore up their operations in the face of declining commodity prices, said Rajpal.

After the conference call, Aiken said he expects questions about the impact of the sector’s woes on commercial and consumer portfolios to persist as Canada’s other large bank’s report earnings this week and next.

“With oil prices testing the waters below $ 30 … we believe that the challenges to energy credits still remain and the question of whether reserves taken by the Canadian banks are adequate will not dissipate anytime soon,” the analyst said.

Despite the continued assurances that oil exposure is manageable, BMO’s chief executive Bill Downe said the bank is not looking to do acquisitions or otherwise deploy capital until at least the middle of the calendar year. At that point, he said, BMO’s regulatory capital buffer is expected to be back to the level it was before the recently closed acquisition of GE Capital’s U. S transportation finance business.

“We just completed the meal. I think it’s time to digest,” Downe told analysts.

BMO’s CET1 ratio, a key measure of a bank’s regulatory capital cushion, fell to 10.1 from 10.7 in the latest quarter, owing to the acquisition.

The bank posted revenue of $ 5.08 million, up 0.4 per cent from a year earlier.

Rob Sedran, an analyst at CIBC World Markets Inc., said the bank’s credit trends are stable, and the results for the first quarter were “roughly in line” with expectations.

“Credit quality trends were slightly weaker but broadly consistent with what we had modeled,” Sedran wrote in a note to clients.

BMO shares fell 16 cents Tuesday to close at $ 73.71 on the Toronto Stock Exchange.