BMO hikes payout, takes aim at jobs
The Bank of Montreal kicked off bank earnings season by substantially increasing provisions for energy-related credit losses in the second quarter — yet still provisioning for losses at a level below analyst expectations.
At the same time, Canada’s fourth-largest bank took a $132-million after-tax restructuring charge to cover severance costs to reduce the workforce by four per cent as more customers shift to mobile and online banking, executives said on a conference call with analysts.
In a statement, BMO said the charge was necessary to “accelerate the use of technology” in serving customers, and to drive efficiency.
A spokesman confirmed the size of the staff reduction, Employee numbers at of the end of April, primarily in Canada and the United States, suggest the cuts will affect about 1,800 positions.
Annual cost savings are expected to be around the same size as the charge, bank executives said on the conference call.
“This comes as no surprise, as we have guided to charges of this nature across the sector reflecting the competitive threat posed by financial technology,” National Bank Financial analyst Peter Routledge said in a note to clients. He said he would not be surprised to see further, similar charges from the Big Six banks as they move to defend their “oligopoly position in Canada from technology-driven upstarts” and other competitors.
When it came to preparing for credit losses, BMO took provisions of $201 million in the second quarter, up substantially from the fiscal quarter and from a year earlier due to energy-related weakness. But analysts had been expecting provisions of close to $250 million. Barclays Capital analyst John Aiken had been expecting an even bigger hit of $260 million.
“Credit continues to perform much stronger than expectations,” Aiken said in a note to clients Wednesday.
Impaired loans more than doubled in the quarter, often a worrying sign with a troubled sector such as Canada’s energy industry. But analysts said BMO’s performance was solid, due to the lower-than-forecast provisions for credit losses, better than anticipated trading revenues, and lower expenses.
BMO posted sequential declines in provisions in both domestic and U.S. retail banking. Still, the impact from low oil prices “continues to weigh” on BMO, as demonstrated by sequential increases in both impaired loans and provisions for credit losses in the bank’s energy portfolio, Aiken said.
On the conference call, BMO’s chief risk officer Surjit Rajpal was asked by Scotia Capital analyst Sumit Malhotra whether BMO is falling behind on provisions, given the rate at which impaired loans are rising. Rajpal responded that the Canadian bank is a senior lender on many of the newly impaired loans in the United States, which, for the time being, makes recovery more likely and reduces the need to provision for losses.
He said he was comfortable that both the bank’s provisions and collective allowances set aside are more than adequate to cover expected losses.
“It covers us quite well,” Rajpal said.
There was enough confidence at BMO to boost the bank’s quarterly dividend by 2.4 per cent, or two cents, to $0.86 per share, a move analysts had been expecting.
In addition to the restructuring charge, BMO took a $79 million (12¢ per share) writedown on an equity investment in the second quarter.
Net income of $973 million (1.45 per share) was down three per cent from the same period a year earlier, while adjusted net income of $1.15 million ($1.71 per share) was up one per cent from the corresponding period a year ago. Diluted earnings per share of $1.73, including the investment writedown, came in a penny below the consensus analyst estimate.
Three of Canada’s major banks will report second quarter results on Thursday, while Bank of Nova Scotia will disclose its results next week.
Analysts expect rising provisions for credit losses in the banks’ energy portfolios through the balance of this year and into 2017, which is expected to tamp down earnings growth.