BMO Results Miss Consensus Estimates

We still think the bank remains positions to weather the upcoming downturn

Eric Compton 28 May, 2020 | 10:26AM

BMO Building with Wires in Foreground
Narrow-moat rated Bank of Montreal (BMO) reported second quarter results that missed S&P Capital IQ consensus estimates as a large COVID-19 reserve build hurt the bank's bottom line; even so, we think the bank still remains positioned to weather the upcoming downturn.

Following a trend we have seen among the Canadian banks so far, Bank of Montreal's provisioning increased over 500% year over year to $1.2 billion as the bank shores up for future credit losses. We expect another large reserve build in the upcoming quarter. As a result, adjusted earnings per share declined 55% year over year to $1.04 and adjusted net income declined 53% compared with the year-ago period. While revenue did decline 3% year over year (5% on a constant currency basis), the bank also brought down expenses by 2%. However, the faster revenue decline led to a 64.4% efficiency ratio, a higher figure than the previous quarter. Adjusted return on tangible common equity came in at 6.4%. Bank of Montreal's common equity Tier 1 ratio came in at 11%, compared with 11.4% last quarter, though a part of this was driven by an increase in risk-weighted assets due to the Clearpool acquisition.

Credit losses remain a key story for Bank of Montreal and bear watching. Based on these results, we are lowering our fair value estimate to $100 per share. Credit costs increased this quarter, with net write-offs as a proportion of average loans coming in at 25 basis points, a 15-basis-point increase compared with the year-ago period. This was impacted by losses related to COVID-19, with particular stress seen in the oil and gas sector as well as in transportation finance, though a fraud-related charge on the commercial side played a role as well.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Bank of Montreal77.99 CAD0.44

About Author

Eric Compton

Eric Compton  Eric Compton is an equity analyst for Morningstar,

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