Bank of Montreal Braces for Loan Losses as U.S. Growth Ebbs

(Bloomberg) -- Bank of Montreal’s U.S. push hit a speed bump in the second quarter as higher loan losses eroded earnings from its Chicago-based BMO Harris Bank.

The lender set aside C$259 million ($192 million) for soured loans, up 29 percent from a year earlier and the highest since at least 2011, tied largely to U.S. personal and commercial banking and corporate services, the Toronto-based firm said Wednesday in a statement. Analysts surveyed by Bloomberg had expected provisions of about C$200 million.

“While there has been a moderation in loan and deposit growth in the United States reflective of slower than anticipated business activity in the first calendar quarter, we are well-positioned to continue to build on the strength of our U.S. franchise,” Chief Executive Officer Bill Downe said in the statement.

The results run counter to those posted last month by U.S. regional lenders such as PNC Financial Services Group Inc., KeyCorp and U.S. Bancorp, all of which reported first-quarter gains in net income. Bank of Montreal said Wednesday that profit from its U.S. retail lender fell 7.5 percent from a year earlier, while provisions surged 50 percent from the prior quarter to C$90 million.

“While far from a disastrous quarter, we do not believe that BMO’s results will receive a warm reception,” said Barclays Plc analyst John Aiken, who raised his rating on the stock this week to equal weight from underweight. “Credit incurred some erosion in the U.S. commercial and energy portfolios and U.S. retail banking saw average loan declines.”

Bank of Montreal shares fell 2.9 percent to C$92.40 at 9:39 a.m. in Toronto, the worst performance in the eight-company S&P/TSX Commercial Banks Index. The stock has slid 4.2 percent this year.

Downe has expanded Bank of Montreal’s U.S. presence through the 2015 purchase of a transportation-finance business from General Electric Co. and the takeover of Milwaukee-based Marshall & Ilsley Corp. in 2011. Bank of Montreal has been in the U.S. Midwest since buying Harris Bank in 1984.

Profit Misses

The Canadian lender’s businesses in the U.S. -- which also include wealth management and capital markets operations -- contributed C$296 million to overall profit in the period ended April 30, the lowest amount since the second quarter of 2016.

Total net income rose 28 percent to C$1.25 billion, or C$1.84 a share, from C$973 million, or C$1.45, a year earlier, the company said. Adjusted profit, which excludes some items, was C$1.92 a share, missing the C$1.93 average estimate of 15 analysts surveyed by Bloomberg. The bank raised its quarterly dividend by 2 cents, or 2.3 percent, to 90 cents a share.

Profit from Canadian personal and commercial banking, the lender’s largest business, rose less than 1 percent to C$531 million, the firm said. That fell short of the C$590 million estimate of RBC Capital Markets analyst Darko Mihelic.

“Perhaps we had expected too much -- in particular, U.S. P&C results appeared light as did Canadian P&C,” Mihelic said in a note. “Overall, we have a mildly negative view of Q2 results."

Bank of Montreal is the first of the country’s biggest lenders to post second-quarter results. Royal Bank of Canada, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce report Thursday, while Bank of Nova Scotia is scheduled for May 30.

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net.

To contact the editors responsible for this story: Peter Eichenbaum at peichenbaum@bloomberg.net, David Scanlan at dscanlan@bloomberg.net, Steven Crabill, Steve Dickson