Bank of Montreal Severances Delay Drive to Control Expenses
Bank of Montreal U.S. Unit Strengthens Even as Earnings Miss
(Bloomberg) -- Bank of Montreal’s aim to drive down costs was spoiled by severance expenses last quarter, delaying progress on the company’s long-standing plan to improve productivity.
The Toronto-based lender’s fiscal second-quarter earnings included C$90 million ($67 million) in severance costs at its BMO Capital Markets division, which helped increase the bank’s non-interest expenses to its highest in at least two years. Results fell short of analysts’ estimates.
“The miss is almost entirely due to a sizable severance charge in Capital Markets that will come with some future cost savings,” RBC Capital Markets analyst Darko Mihelic said in a note to clients. “We view most of the expense miss as a one-time hit that will generate savings going forward.”
Bank of Montreal shares fell 2.6% to C$100.41 at 12:28 p.m. in Toronto. They had the biggest decline among the eight companies in Canada’s S&P/TSX Commercial Banks Index, which slumped 1.3%.
Non-interest expenses climbed to C$3.6 billion for the three months through April 30, with higher expenses and loan-loss provisions in both Canadian and U.S. banking. Increased costs left the bank’s adjusted efficiency ratio -- a measure of what it costs to produce a dollar of revenue -- unchanged at 63.6% from the first quarter, far from the firm’s target. Chief Executive Officer Darryl White has made it a mission to boost productivity at what’s been the least efficient among Canada’s big banks.
“We’re committed to our efficiency target of 58% by 2021 and at the same time we’re taking disciplined actions to execute against our strategy and position the bank for sustainable growth over the long term,” White said on a conference call with analysts Wednesday.
Bank of Montreal, which cut about 100 jobs in its capital markets division earlier this month, cited costs from buying a U.S. broker-dealer, severance expenses and provisions as the reason behind a 13% profit drop in BMO Capital Markets for the quarter. The severances will yield C$40 million in benefits this year and C$80 million next year, company executives said on the call. The organizational changes “impacted operating leverage in the current quarter and will deliver improved efficiency going forward,” White said.
Other divisions saw growth, with earnings from its U.S. retail banking division rising 17% to outpace the 4.6% gain in Canadian banking, even as both units also recorded higher loan-loss provisions.
Bank of Montreal set aside more money for bad loans, with C$176 million in provisions for credit losses, up 28% from the previous three months and 10% from a year earlier, according to a statement Wednesday. The amount was less than analysts had expected.
Cost Increases
Bank of Montreal expects cost increases to slow after adjusted expenses climbed a little more than 7% in the first half, Chief Financial Officer Tom Flynn said in a phone interview.
“We do expect that number to be lower in the second half of the year” by about half, Flynn said. “That will come from our ongoing focus that we’ve got on making investments in select places,” including technology, and “just generally managing costs very actively.”
Net income rose 20% to almost C$1.5 billion, or C$2.26 a share, from a year earlier, with adjusted per-share earnings missing the C$2.33 average estimate of 14 analysts in a Bloomberg survey by three cents.
To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net
To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, ;David Scanlan at dscanlan@bloomberg.net, Daniel Taub, Steven Crabill
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