BMO profit in Q4 falls well below predictions

‘Abysmal’ results in capital markets a major factor

TORONTO Bank earnings season started with a thud Tuesday after Bank of Montreal’s profit fell short of estimates amid weakness in its capital-markets division that might not bode well for other big banks.

BMO, the country’s fourth-largest bank by market capitalization, said its net income for the three months ended Oct. 31 was $1.07 billion, or $1.56 a share, compared with $1.074 billion, or $1.62 a share, a year earlier. Adjusted earnings per share were $1.63, representing a miss of five cents versus the $1.68 average estimate of 14 analysts surveyed by Bloomberg. Its shares closed 2.3 per cent lower at $81.42.

“While BMO continues to show progress in U.S. retail, an abysmal capital markets quarter, noise in wealth management and flat domestic retail earnings on top of an arguably low-quality miss will not likely provide much excitement and could weigh on the sector as a whole, unless better earnings are produced throughout the remainder of the week,” said John Aiken, analyst at Barclays Capital Markets, in a note to clients.

BMO, which reported overall adjusted earnings for 2014 of $4.5 billion, said net income for the capital-markets business slumped $26 million from last year to $191 million on “higher revenue that was more than offset by higher expenses and lower loan recoveries.”

Earnings at the bank’s wealthmanagement division also fell on a year-over-year basis, dropping to $253 million compared with $318 million from the fourth quarter in 2013.

Personal and commercial banking in Canada, however, contributed adjusted net income of $526 million in the fourth quarter, representing a year-over-year increase of $65 million, or 14 per cent, and relatively unchanged from the third quarter of this year.

Earnings for the P&C segment south of the border, meanwhile, jumped to $163 million from $109 million last year and $158 million in the third quarter this year.

BMO said on Tuesday it will increase its quarterly dividend by two cents to 80 cents per share. The bank also said it would buy back up to 15 million shares.

Aiken said strength in BMO’s U.S. retail segment was offset by its “weakest capital markets earnings in over two years” and sees “little to get excited about for the other banks yet to report.”

This is particularly true of Royal Bank of Canada, whose shares fell 1.6 per cent to $81.42 on Tuesday, more than any other Big Six bank besides BMO.

“The weaker capital markets reported by BMO provides incremental concern for Royal Bank and National Bank, which have the greatest relative exposures, but this will likely impact the entire group, given the lift each received in the third quarter,” he said.

“Further, with decent but not spectacular earnings in domestic retail, highlighted by easing lending volume growth, the engine for earnings growth (and positive surprises) for the group appears to be revving a little slower.”

Other analysts were more upbeat about BMO’s quarter, including National Bank Financial’s Peter Routledge. He said the bank’s core P&C business — both here and south of the border — continues to generate loan growth equal to or better than its competitors, while BMO’s wealth-management franchise “remains a reliable source of capital-light revenue growth.”

The capital-markets results were disappointing, he added, but not terrible, and despite signs of weakening household credit quality in Canada, he remains comfortable with BMO’s credit standards.

“Overall, we regard BMO’s Q4 2014 results as in line with our expectations for the bank and indicative of stable franchises in each of its business segments,” he said in a note to clients.