BMO Tops Estimates as Provisions Drop, Loan Income Recovers

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Bank of Montreal’s fiscal second-quarter earnings beat estimates as the waning Covid-19 crisis allowed the lender to set aside less for souring loans and gave a lift to the company’s personal and commercial banking businesses.

Profit more than doubled in Bank of Montreal’s Canadian personal and commercial banking unit and rose 60% in its U.S. division in the three months through April, the Toronto-based lender said Wednesday. Total provisions for credit losses fell 95% from a year earlier.

Given vaccination progress in the U.S. and Canada, the pandemic is likely to conclude without the once-expected deluge of souring loans. That’s giving individuals and businesses confidence to ramp up borrowing, boosting Bank of Montreal’s personal and commercial loan balances in the U.S. from the first quarter and lifting its company and consumer installment loans in Canada. The firm also kept expenses in check, a key focus for investors.

“These results are really good,” James Shanahan, an analyst at Edward Jones in St. Louis, said in an interview, while noting that expectations for the bank were high. “On the things that they can control, they’re doing a really good job.”

Bank of Montreal shares rose 1.1% to C$124.98 at 1:56 p.m. in Toronto. They’ve risen 29% this year, compared with a 22% gain for the S&P/TSX Commercial Banks Index.

With the risk of widespread defaults fading, Bank of Montreal set aside just C$60 million ($50 million) in provisions for credit losses last quarter. That compares with C$1.12 billion in provisions a year earlier and is less than analysts’ C$219 million average estimate for set-asides. The lender even recorded a C$13 million recovery of provisions for performing loans in its Canadian banking business and a C$29 million recovery in the U.S. unit.

BMO Tops Estimates as Provisions Drop, Loan Income Recovers

Net income rose 89% to C$1.3 billion, or C$1.91 a share. Excluding some items, profit was C$3.13 a share. Analysts estimated C$2.75, on average.

While most banks are benefiting from strong performance in their capital-markets divisions, Bank of Montreal is getting an extra boost because the unit stumbled with trading losses in the year-earlier period. The firm posted capital-markets net income of C$563 million last quarter, compared with a C$74 million net loss in the year-earlier period.

Canada’s hot housing market continued to fuel Bank of Montreal’s domestic mortgage business, with residential mortgage balances rising from both the first quarter and a year earlier. Bank of Montreal’s Canadian credit-card portfolio shrank as the country’s continued lockdowns restrained spending.

Canada’s fourth-largest lender by assets has kept a focus on costs throughout the pandemic. The company’s adjusted net efficiency ratio improved to 56.6% from 63.8% a year earlier.

Chief Financial Officer Tayfun Tuzun said the bank has had success keeping its technology costs in check while still investing in its digital operations. It has also restrained expense growth in the capital-markets business, despite gains in performance-based compensation, he said. The bank also is reviewing its real estate footprint and may trim some office space as a portion of its workforce continues to work remotely even after pandemic restrictions are relaxed, Tuzun said in an interview.

“We are taking a close look at the post-Covid environment and how we are going to work in that environment,” he said. “That will also help us keep expense growth in control.”

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