Bank of Montreal Sets Aside $813 Million for Soured Loans

(Bloomberg) -- Bank of Montreal followed other Canadian lenders in building up reserves for loan losses to brace for the aftershocks from plunging oil prices and a pandemic that’s caused a near economic standstill.

• Bank of Montreal, which has consumer-banking operations in Canada and the U.S., set aside a record C$1.12 billion ($813 million) in loan-loss provisions in the fiscal second quarter. The Toronto-based lender joins Bank of Nova Scotia and National Bank of Canada in posting a surge in provisions, which eroded earnings in results for Bank of Montreal that missed analysts’ estimates.

Key Insights

• Banks in Canada are trying to get ahead of soured loans they expect to result from the double-whammy of low oil prices sideswiping the energy industry and pandemic-spurred lockdowns that shuttered businesses, leading to record unemployment. Bank of Montreal’s provisions as a percentage of average net loans was 0.94% in the quarter, triple the portion in the first quarter and up from 0.16% a year earlier.
• Canadian banking is the lender’s largest division and typically accounts for most of its loan-loss provisions. The domestic retail bank posted C$361 million of profit in the quarter, down 41% from a year earlier on a surge in provisions.
• Chief Executive Officer Darryl White has pushed for more growth from the U.S. banking division, which includes Chicago-based BMO Harris Bank. Earnings from the U.S. personal and commercial division fell 17% to C$339 million from a year earlier.
• Market volatility in the early days of Covid-19 had been a boon for banks’ capital-markets divisions thanks to heavy trading, countering some of the pandemic’s pain. That volatility failed to help Bank of Montreal. The company’s BMO Capital Markets unit posted a C$74 million loss in the quarter, compared with a C$250 million profit a year earlier, as trading revenue and investment banking fees fell.

Market Reaction

• Bank of Montreal shares have fallen 30% this year through Tuesday, compared with a 20% decline for Canada’s eight-company S&P/TSX Commercial Banks Index.

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• Second-quarter net income fell 54% to C$689 million, or C$1 a share, from C$1.5 billion, or C$2.26 a share, a year earlier. Adjusted per-share earnings totaled C$1.04 a share, missing the C$1.27 average estimate of 12 analysts in a Bloomberg survey.
• Read more about Bank of Montreal’s quarterly results here.

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