Higher provisioning, lagging insurance eat into BMO’s Q3 results

We have long expected credit costs to tick up and normalize for the Canadian banks and do not see anything too alarming in current results

Eric Compton 28 August, 2019 | 9:00AM

Narrow-moat rated Bank of Montreal (BMO) reported worse-than-expected fiscal third-quarter results, missing consensus EPS estimates by a little over 4%. Revenue was up 4.5% while expenses were up 4%, however, year-over-year share repurchases helped EPS to grow roughly 5%. The biggest miss came from provisioning, which shot up to $306 million in the quarter, from a range that was consistently below $200 million in previous quarters. Management emphasized that it does not see any patterns of systemic weakening in its portfolios. A good chunk of the extra provisioning was due to some issues related to a new collections system, where problems making collections in the current quarter caused losses to increase, but management states that those issues are largely solved at this point, and it does not see any evidence of further weakening in its early delinquencies. As such, we would expect this is likely to dissipate over the next several quarters. After making some minor adjustments to our projections, we are lowering our fair value estimate to $103 from $104 for Canadian shares . BMO reported a 13.5% adjusted return on equity for the quarter, bringing year-to-date ROE to 13.7%, roughly 90 basis points below 2018 results. We were already projecting declines in ROE. The bank remains on track to achieve operating leverage for the year, and management stuck to its longer-term goal of a 58% efficiency ratio. The bank did break through the 60% barrier for the first time, coming in at 59.9% in the current quarter.

As we covered above, credit quality did seemingly deteriorate a bit during the quarter, however, it appears to be largely due to idiosyncratic factors, mainly the collection system issues, one commercial credit, and a slightly worse economic outlook. We have long expected credit costs to tick up and normalize for the Canadian banks and do not see anything too alarming in current results. Loan growth continues to be outsized in the U.S. commercial portfolio, but so far this portfolio has performed well.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Bank of Montreal67.13 CAD-5.53

About Author

Eric Compton

Eric Compton  Eric Compton is an equity analyst for Morningstar,