U. S. BLUNTS BMO RESULTS

Bank sees signs of housing cooldown

The Bank of Montreal is starting to see “early indications” that Toronto’s overheated housing market is “cooling,” executives said Wednesday.

While the Ontario government’s plan to rein in soaring house prices in Canada’s biggest city is still in its early days, BMO chief financial officer Tom Flynn said there are “signs that their policies might have the desired effect.”

“Some of the feedback from the people that we have on the ground is that activity levels from a pricing perspective look like they might be a little less robust than they’ve been,” Flynn said in an interview, echoing comment made on a conference call. “So we would view that as a positive thing.”

The c omments c a me as BMO reported its fiscal second- quarter results, the first of Canada’s big banks to release its earnings for the period ended on April 30.

Although concerns about the domestic banking market have been rising — Moody’s Investors Service downgraded the debt ratings of several of the country’s largest banks earlier this month over escalating housing prices and increasingly indebted consumers — it was deteriorating credit quality in BMO’s commercial portfolio south of the border that weighed down its results.

BMO reported adjusted earnings per share of $ 1.92, up 11 per cent from the same period a year earlier, but one penny short of the figure expected by analysts surveyed by Bloomberg.

That notional miss was driven in large part by a jump in provisions for credit losses, or money set aside for bad loans, which rose 28.9 per cent to $ 259 million. Breaking out the lender’s U.S. personal and commercial banking segment, these loan losses were $90 million — up 76.4 per cent year-over-year.

Despite a double- digit rise in profit in the past quarter, the bank’s results were met with lukewarm response from analysts and the market. BMO shares were down some 3.3 per cent on Wednesday.

Meny Grauman, an analyst with Cormark Securities in Toronto, said BMO’s results came in “with a whimper rather than a bang.”

While Canadian credit remains “solid” and loan growth remains “firm,” south of the border BMO saw weak lending net interest income “driven by a more dramatic slowdown in U.S. commercial loan growth and a more modest increase in U. S. margins than we had expected,” he said in a note to clients ahead of BMO’s conference call.

“For all of the ( growing) fear about the state of the domestic banking market, the weakness in BMO’s Q2 results was largely a Made In the USA issue led by a big jump in commercial loan loss provisions, but also impacted by a dramatic slowdown in U. S. commercial l oan growth,” Grauman said.

“Although the Fed data has clearly pointed to a deceleration in U. S. commercial loan growth, the end result was larger than we had expected. The good news is that this slowdown is likely to be temporary as U. S. economic fundamentals continue to improve after a soft Q1.”

BMO’s chief executive Bill Downe said with the bank’s “diversified” business model, it is well positioned to deliver solid results for the year.

“While there has been general moderation in loan and deposit growth, reflective of slower than anticipated business activity in the quarter, we’re well positioned to continue to build on the strength of the U. S. franchise,” said BMO chief executive Bill Downe on a call with analysts.

Grauman added that the uptick in loan losses in that sector reflected a “normalization” in credit quality. “It’s not likely to reverse significantly going forward, but it’s not indicating a bigger problem,” he said in an interview.

The bank also announced a hike to its dividend of two cents from the previous quarter to $0.90.

Although loan losses were more than 20 per cent higher than what the market had expected and amid a drop in trading revenues, BMO hit expectations with the help of a strong performance in wealth management, good cost controls and enough earnings to be able to lift a dividend, said John Aiken, an analyst with Barclays in Toronto.

“Depending on what we see with the other banks over the next week, and as well as general optimism behind the economies of both Canada and the U. S., we do think this is just an unusual lumpy quarter, as opposed to the start of significantly higher credit losses,” Aiken said in an interview.