BMO’s Lower Set-Asides Strategy Pays Off as Provisions Improve

Bank of Montreal didn’t go as far as its Canadian peers in setting aside money for souring loans in the early days of the Covid-19 pandemic, a strategy that may have worked in its favor.

  • Canada’s fourth-largest lender by assets set aside less for provisions in its fiscal third quarter than the record amount earmarked in the second, supporting the firm’s earlier view that its allowances are “appropriate” for navigating the crisis. Still, provisions of C$1.05 billion ($798 million) eroded earnings in results that beat analysts’ estimates.

Key Insights

  • Bank of Montreal is the first Canadian lender to report results for the third quarter, a period in which the nation’s six-biggest banks are expected to see an average profit decline of 30%, according to the average estimates of seven analysts. Bank of Montreal’s 21% earnings drop may give investors an indication of how the pandemic continues to cause havoc for the banks.
  • Compared with rivals, Bank of Montreal set aside the least for souring loans in the second quarter, with provisions measured as a percentage of loans. That ratio was 0.89% in the third quarter, compared with 0.94% in the second and 0.28% a year earlier.
  • Bank of Montreal, which has consumer-banking operations in Canada and the U.S., typically earns more from its domestic operations, though Chief Executive Officer Darryl White has been pushing for more growth from its southern neighbor. Profit at the Canadian division fell 51% from a year earlier, while in the U.S. it declined 29% to C$263 million, as loan-loss provisions surged from a year earlier in both regions.
  • The bank’s BMO Capital Markets unit was sideswiped in the second quarter by surging provisions that rivaled those in other divisions and losses from its worst trading day in more than a decade. The division regained profitability in the quarter, with earnings rising 36% to C$426 million a year earlier, amid an increase in trading and higher investment-banking fees.

Market Reaction

  • Bank of Montreal shares have fallen 24% this year through Monday, lagging the 13% decline for Canada’s eight-company S&P/TSX Commercial Banks Index.

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  • Third-quarter net income decreased 21% to C$1.23 billion, or C$1.81 a share. Adjusted per-share earnings totaled C$1.85 a share, beating the C$1.73 average estimate of 12 analysts in a Bloomberg survey.
  • Read more about Bank of Montreal’s quarterly results here.

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