BMO’s expense clampdown takes center stage

On the basis of these results, we do not plan to make any material changes to our fair value estimates

Eric Compton 4 December, 2019 | 12:30AM

BMO Building with Wires in Foreground

Narrow-moat-rated Bank of Montreal (BMO) reported adjusted fourth-quarter results that were generally in line with CapIQ consensus estimates. Adjusted revenue was up 5% while adjusted expenses were up just 1%. This led to adjusted net income and earnings per share growth of roughly 5% each. Reported results looked worse largely because of a $484 million restructuring charge that the bank took during the quarter. Provisioning came down a bit from the third quarter, dropping roughly 18%. Adjusted return on equity came in at 13.5%, roughly in line with the mid- to upper 13% range we've seen for much of the year. On the basis of these results, we do not plan to make any material changes to our fair value estimates of $103.

On an adjusted basis, the bank improved its annual efficiency ratio to 61.4% during fiscal 2019 from 61.9% in the prior-year period. Management, which is sticking with its stated long-term goal of a 58% efficiency ratio by 2021, provided a bit of color around the restructuring charge, noting that it is a bankwide charge (affecting all segments) and that it is unlikely to take additional charges from here. It also highlighted the fact that it had not planned to take the current charge even a few quarters ago, noting that the decision to take it was influenced to a large degree by the more difficult macro environment and the need to take these actions now in order to accelerate certain expense savings.

Management expects the current restructuring to allow the firm to achieve annual run-rate savings of about $375 million by the first quarter of 2021. Looking at the numbers, and based on adjusted 2019 results, we think the bank would need to maintain revenue growth of roughly 5% and keep expense growth to 2% during the next two fiscal years to meet its 58% efficiency ratio goal. While not impossible, it is also not guaranteed. We expect that this will be a key development to watch.

At the segment level, all areas generally performed well. Canadian personal and commercial banking had revenue growth of 7% and expense growth of 4%, while net income was up 6%. Average deposits were up 13%, while total loans were up 7%, both strong numbers. For U.S. P&C banking, loan growth was again quite strong, as average loans were up 13%, driven by 15% commercial lending growth. Management expects this to moderate. Adjusted net income for the U.S. P&C banking group was up 4%. BMO expects net interest margins to decline again in the first quarter as the final U.S. rate cut feeds through, but to stabilize from there. The capital markets segment saw net income drop 9% as expense and provisioning growth more than outpaced revenue growth. The company continues to expand its U.S. operations at a strong pace, and with a tougher 2019 behind it, we would expect this segment to reach more consistent net income growth in 2020. The wealth management segment's assets under management were up 8%, and net income was up 31%. The bank continues to exit the reinsurance space, which should be essentially complete by mid-2020.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Bank of Montreal99.88 CAD-0.14

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Eric Compton

Eric Compton  Eric Compton is an equity analyst for Morningstar,