BMO Results Miss Consensus Estimates

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

Eric Compton 28 May, 2020 | 10:26AM
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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.

Management expects impaired loans to increase in the upcoming quarters as the COVID-19-related impacts on the economy play out. Most segments of the bank performed well, with the exception of Capital Markets, which was negatively impacted by equity-linked note products, markdowns on held-for-sale loans, and credit losses. This was in contrast to some peers, where their capital markets segments generally did well. The Canadian personal and commercial banking segment reported a 2.5% and a 3% year-over-year increase in revenue and expenses, respectively.

Even so, net income was down 40% compared with the year-ago period as a result of a large build in provisioning, particularly on the commercial side. Average loans and deposits were up 7% and 15% year over year, respectively, due to growth on the commercial side, with commercial clients drawing down commitments and re-depositing them with the bank to shore up on liquidity. The U.S. personal and commercial banking segment reflected a similar story, with revenue and expenses up 6% and 2% year over year, respectively. A large provisioning build led to a 19% decline in net income compared with the year-ago period.

Like its Canadian counterpart, the U.S. P&C segment experienced 13% and 18% year-over-year loan and deposit growth, respectively, as a result of increased activity on the commercial side. The Capital Markets segment reported a net loss of $74 million, in part impacted by increased provisioning due to stress in the energy and apparel retail sectors. The segment also saw a 15% year-over-year decline in revenue due to market volatility, particularly on the equities side. The Wealth Management segment reported stable assets under management, though a legal provision, lower insurance income, and lower equity markets performance led to a 53% year-over-year decline in net income. Bank of Montreal's net interest margin (NIM) segments further into the year. There was also some detail on exposure to COVID-19-related industries, which make up about 10.6% of total loans and acceptances. This is generally higher than what we have seen from peers so far.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Bank of Montreal126.75 CAD1.11Rating

About Author

Eric Compton

Eric Compton  Eric Compton, CFA, is an equities strategist for Morningstar Research Services LLC, covering the U.S. and Canadian banking sectors, including the U.S. money center banks, U.S. regional banks, and the Big Six Canadian banks.

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