U.S. earnings growth continues to outstrip bank as a whole: BMO
The chief executive officer TORONTO of Bank of Montreal says the lender’s future includes a rate of earnings growth in the United States that will keep outstripping that of the bank as a whole.
BMO’s forecast came after the bank reported that the contribution of U.S. businesses to its total adjusted earnings rose to 28 per cent for its fiscal 2018, up from 24 per cent for the previous year.
“The U.S. segment remains a top priority, where we’ll continue to grow earnings at a faster pace than the overall bank,” said Darryl White, BMO CEO, during a conference call on Tuesday morning after the bank reported results for the fourth quarter and full year ended Oct. 31.
Canadian banks with considerable U.S. footprints have been reaping the benefits this year of both tax reform and interest-rate hikes south of the border.
BMO is no exception. In its investor presentation, the bank showed that the U.S. segment contributed US$1.28 billion in adjusted earnings for its fiscal 2018, an increase of about 26 per cent from the prior year.
Overall, BMO’s profit rose two per cent to $5.45 billion for the full year, which included the effects of tax reform in the U.S.
Canada’s fourth-largest lender noted it took a one-time, noncash charge to net income in 2018 of $425 million, which it said was because of the cut in the U.S. corporate tax rate affecting its deferred tax assets. However, the bank also said that U.S. tax reform boosted its annual net income by about US$100 million.
On an adjusted basis, excluding the U.S. tax hit, BMO’s profit for 2018 was nearly $6 billion, up nine per cent from its fiscal 2017.
For the quarter, BMO reported a profit of nearly $1.7 billion, an increase of 38 per cent from the same period last year, which the lender said was helped by a $203-million after-tax benefit from remeasuring an employee-benefit liability.
The bank’s adjusted earnings per share jumped 19 per cent, to $2.32, beating the consensus estimate of $2.30. BMO also announced it was hiking its dividend by four cents to $1.
White said in a press release that the results were “led by strong performance in our Personal and Commercial banking businesses.”
“We grew our U.S. segment at an accelerated pace, increased momentum in our Commercial banking business, adding relationships, loans and deposits, and delivered real value to our personal customers with new and enhanced digital capabilities,” he said.
The bank added to its U.S. operations during the fourth quarter, as it completed its acquisition of KGS-Alpha Capital Markets, a New York-based fixed-income broker-dealer that specializes in U.S. mortgage and asset-backed securities.
BMO said the acquisition drew down its Common Equity Tier 1 ratio, a measure of financial strength, by 22 basis points. The bank’s CET1 Ratio stood at 11.3 per cent as of the end of its fourth quarter, down from 11.4 per cent for the prior quarter.
“The investments that we’ve made this year, particularly in the U.S., position us for good earnings growth in 2019,” White said during the conference call.
Canaccord Genuity analyst Scott Chan said in a note that BMO had “delivered strong results” in its personal and commercial banking businesses in Canada and the U.S.
“Both platforms benefited from solid loan (specifically commercial) and deposit growth generating positive operating leverage,” Chan added.
BMO’s peers reported their latest quarterly and annual earnings last week, drawing mixed reactions from analysts and the market. Canada’s two biggest lenders, Toronto-Dominion Bank and Royal Bank of Canada, beat estimates with quarterly net income of $2.96 billion and $3.25 billion, respectively. Canadian Imperial Bank of Commerce and Bank of Nova Scotia posted net income for the period of $1.27 billion and $2.27 billion, respectively, falling just short of analyst estimates.
The latest quarterly results for Canada’s banks were helped by strong contributions from their international operations, whether in the U.S. or in Latin America and the Caribbean, and BMO was no exception.
Meanwhile, the raft of rate hikes on both sides of the border that have padded the banks’ net interest margins — the difference between the money they earn on the loans they make and what they pay out to savers — may be less beneficial in the quarters ahead.
Pressure has mounted on banks to increase the amount they pay to depositors, particularly south of the border, said James Shanahan, an analyst with Edward Jones.
“It’s pretty competitive right now ... The banks were slow to raise deposit costs. and it began to accelerate about three quarters ago,” he said.