BMO lowers rate-cut expectations amid mixed second quarter results

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The effects of “higher for longer” interest rates dampened an otherwise strong operating quarter for Bank of Montreal, with higher provisions for credit losses causing Canada’s third-largest bank to fall short of analyst estimates.

On a conference call with analysts Wednesday to discuss financial results for the second quarter, which ended April 30, BMO executives cited a slight uptick in Canada’s unemployment figures and commercial real estate issues in the United States among the reasons for increased provisions and impaired loans.

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“Credit risk, while elevated from last quarter, is well managed in what continues to be a challenging environment for many of our customers where some individuals and businesses are being impacted by prolonged higher interest rates and a slowing economy,” said Darryl White, BMO’s chief executive. “We now expect somewhat fewer and delayed rate cuts this year in both Canada and U.S., with the Bank of Canada expected to begin lowering rates this summer and the Fed in the fall at a moderate pace.”

The bank posted net income of $1.87 billion ($2.36 per share) on revenue of nearly $8 billion, up from $7.7 billion a year ago. On an adjusted basis stripping out one-time items, net income was $2.03 billion ($2.59 per share), a decline of 10 per cent from a year ago and below the consensus analyst estimate of $2.76 in earnings per share. Adjusted revenue in the year-earlier quarter was nearly $7.9 billion.

Provisions for credit losses in the second quarter were 30 per cent higher than forecast, National Bank Financial analyst Gabriel Dechaine said in a note to clients, adding that gross impaired loans of $5.3 billion were up 24 per cent from the previous quarter, led by BMO’s U.S. commercial/wholesale book, and up 98 per cent year-over-year.

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The gross impaired loan ratio grew to 79 basis points from 65 basis points in the first quarter and 41 basis points a year ago and the pain was spread across several sectors in the U.S., including service industries and commercial real estate and transportation, the analyst said.

Offsetting the credit picture was an improved balance between revenue generation and cost controls across the bank, an increase in the closely watched CET1 capital cushion, and a three per cent dividend increase, the analysts said.

White said the bank’s strong operating and capital position should help weather the continued effects of higher rates.

“We’ve delivered on our commitments with expenses down, compared with last year and last quarter,” he said. “Our balance sheet strength is evident in a CET1 ratio above 13 per cent, robust customer deposit growth and appropriate provisioning for the credit environment, which continues to be impacted by prolonged high interest rates and a slowing economy.”

He and other executives on the conference call said the U.S. market continued to be challenging for regional banks in the wake of the failure of Silicon Valley Bank in March 2023. Moreover, they said, there is serious competition for deposits in that market.

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“Since March of last year, the U.S. banking industry has experienced more muted loan growth and intensified deposit competition as the Fed continues quantitative tightening,” White said, adding that BMO has the benefit of nearly 40 years in the market as well as recently added scale and synergies from the acquisition of Bank of the West last year.

“We’re building clear competitive advantages in a highly fragmented market structure and, as a result, we’ve delivered resilient performance ahead of U.S. regional bank competitors,” he said.

BMO reported net income of $543 million in its U.S. personal and commercial division in the second quarter, a decrease of 26 per cent from a year earlier. Adjusted net income was $612 million, a decrease of 24 per cent from a year ago.

The results reflected lower revenue due to a decrease in net interest income, primarily from lower margins, BMO said, as well as lower non-interest revenue, lower expenses and a higher provision for credit losses.

The picture was brighter in Canada, with BMO reporting net income was $872 million, a six per cent increase from the prior year. Adjusted net income for the Canadian personal and commercial division was $877 million, an increase of seven per cent.

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The results were distilled from a 13 per cent increase in revenue, with higher net interest income driven by balance growth and higher margins alongside higher non-interest revenue. This was partially offset by higher expenses and a higher provision for credit losses in the division.

“We achieved strong pre-provision, pre-tax earnings growth of seven per cent from last year, driven by continued momentum in Canadian personal and commercial banking, and strengthening performance in our capital markets and wealth businesses,” White said on the conference call.

“Canadian P&C delivered record revenue … with industry-leading growth and customer acquisition, contributing to market share gains.”

• Email: bshecter@nationalpost.com

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