BMO cost controls paying off
Bank’s revenues, expense controls top expectations after restructuring
Bank of Montreal kicked off earnings season Tuesday by beating analyst estimates and easing concerns about oil and gas exposure and consumer credit, despite a bump in provisions for credit losses tied to the energy sector.
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 across the bank’s operations this quarter, analysts said.
“This expense performance largely underpinned the beat to our estimates,” said National Bank Financial analyst Peter Routledge.
He said BMO appears to be “reaping the early rewards” of a restructuring announced last quarter that included a $132 million after-tax charge to cover severance costs to reduce the workforce by four per cent.
The bank said the restructuring was done to adjust to the shift of customers to mobile and online banking.
BMO took total provisions for credit losses of $257 million during the third quarter, compared with $160 million a year earlier and $201 million in the second quarter.
“We remain comfortable with our oil and gas portfolio, and our provisioning,” Surjit Rajpal, BMO’s chief risk officer, said on a conference call with analysts.
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.
The higher loan-loss provisions taken by BMO in the quarter were driven by a “significant” rise in Canadian oil and gas impaired loan formations — $72 million compared to $41 million last quarter — which was somewhat masked by a sizable drop in U.S. formations, according to National Bank’s Routledge.
In a note to clients, the analyst said Canadian consumer provisions for credit losses were “conspicuously absent from the explanation,” ticking up to just $106 million from $105 million in the prior quarter.
Routledge 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.”
On the call with analysts, BMO’s chief Bill Downe declined to weigh in on whether more government intervention is needed to cool hot pockets of Canada’s real estate market — something Bank of Nova Scotia CEO Brian Porter publicly suggested earlier this summer.
“I don’t have a great deal to add to what has already been said,” Downe said. “I think you have to let the adjustments that have been made run through and see what the impact is.”
The latest government move was the imposition this month of an additional land transfer tax for foreign buyers of residential properties in Vancouver.
Rajpal said BMO recognizes some markets have more “froth” than others, and makes adjustments accordingly, including determining how much to lend for higher value homes.
The bank’s revenue climbed 17 per cent to $5.6 billion in the third quarter.
“We had good performance across our operating groups, particularly in Personal & Commercial Banking and BMO Capital Markets,” said Downe.