The Standard (St. Catharines)

BMO kicks off earnings season with a bang

Beats profit forecasts

- BARBARA SHECTER FINANCIAL POST

Canada’s fourth largest bank posted net income of $1.2 billion ($1.86 a share) for the quarter ending July 31, up four per cent from $1.19 billion ($1.80) a year earlier.

Both revenues and expense controls topped expectatio­ns, and core cash earnings per share came in at $1.94, handily beating the analyst consensus estimate of $1.81.

“While credit was expected to be a significan­t theme in the quarter, we no longer believe that energy exposures are driving valuations and consumer credit remained benign,” said John Aiken, an analyst at Barclays Capital, in a note to clients. “On the consumer front, there was no significan­t change to consumer charge-offs and no apparent uptick in delinquenc­ies.”

If the trend continues, it will “take some wind out of the sails of the bear thesis on credit,” Aiken wrote.

BMO set aside more energy-related provisions for credit losses, but this was offset by better expense control, analysts said.

Total provisions for credit losses in the quarter were $257 million, compared with $160 million a year earlier and $201 million in the second quarter.

Last quarter, BMO announced it would take a $132 million aftertax restructur­ing charge to coverage severance costs to reduce its workforce by four per cent. The bank said it was adjusting to the shift of customers to mobile and online banking.

Rob Sedran, an analyst at CIBC Capital Markets, said BMO’s loan losses remain “reasonably well controlled,” while a closely watched capital measure, the CET1 ratio, “strengthen­ed materially” during the third quarter to 10.5 from 10.

“Overall, this was a good showing with both revenues and expenses coming in better than modelled,” Sedran said in note to clients.

BMO’s revenue for the quarter climbed to $5.6 billion, up 17 per cent.

“We had good performanc­e across our operating groups, particular­ly in Personal & Commercial Banking and BMO Capital Markets,” said Bill Downe, the bank’s chief executive.

Peter Routledge, an analyst at National Bank Financial, said every segment posted non-interest expenses that were below his forecast.

“This expense performanc­e largely underpinne­d the beat to our estimates,” he said in a note to clients, adding that BMO appears to be “reaping the early rewards” of the reduction of its workforce.

Routledge said BMO’s higher than expected provisions for credit losses came from a surprising source — commercial rather than consumer loans.

A significan­t rise in Canadian oil and gas impaired loan formations, which climbed to $72 million from $41 million last quarter, were masked by a sizable drop in U.S. formations, the analyst wrote.

Routledge said Canadian consumer provisions for credit losses were “conspicuou­sly absent from the explanatio­n,” Routledge said. They ticked up to just $106 million from $105 million in the prior quarter.

He suggested that rising house prices in Canada’s two largest markets, Toronto and Vancouver, which are up 13 per cent and 24 per respective­ly cent from a year ago, “act as a firewall against a material deteriorat­ion” in consumer credit.

“When house prices in those two cities stabilize or, more problemati­cally, decline, then we do expect a material increase in loan losses,” he wrote. “That, however, is a concern for another day.”

Newspapers in English

Newspapers from Canada