BMO Financial Group reported a third-quarter profit of $1.87 billion as its provision for credit losses rose compared with a year ago. The BMO Bank of Montreal logo is seen on the BMO Nova Centre, housing their Atlantic Canadian headquarters and support services, in Halifax on Tuesday, April 2, 2019. THE CANADIAN PRESS
TORONTO- BMO Financial Group’s quarterly results have been negatively impacted by issues with its loan portfolio, leading analysts to worry that the bank may be an outlier in the current credit cycle.
On Tuesday, the bank revealed that its provision for credit losses reached $906 million for the third quarter, a significant increase from $492 million a year ago. This rise in provisions contributed to a decrease in adjusted earnings compared to last year.
Darryl White, the bank’s CEO, noted that the extent of these loan loss provisions was higher than expected and that they are likely to remain elevated in the near future. He attributed this to the combined effects of prolonged high interest rates, economic uncertainty, and shifting consumer preferences.
While some sectors, such as trucking and commercial loans, are experiencing particular stress, the bank clarified that the increase in potential losses is not confined to specific regions or industries. Instead, it reflects a broader adjustment from the unique credit conditions of the pandemic era, where borrowers benefitted from low rates and government stimulus but are now struggling with higher rates and reduced consumer spending.
White explained that these conditions can obscure underlying problems, which may resurface later. Although the Bank of Canada has begun lowering its key interest rate and the U.S. Federal Reserve is expected to do so soon, relief will be gradual, and some businesses will face ongoing challenges.
Piyush Agrawal, the bank’s chief risk officer, acknowledged the difficulty in predicting changes in provisions from quarter to quarter due to heightened unpredictability. He compared the situation to a scenario where numerous bidders disappear from a sale, leaving uncertainty.
The bank's impaired loan ratio rose to 0.5% in the third quarter, up from 0.21% a year ago and 0.41% in the previous quarter. This increase follows an unexpected rise in provisions last quarter, which had previously caused the bank’s share price to drop nearly nine percent.
On Tuesday, BMO’s shares fell 6.45% to close at $112.04 on the Toronto Stock Exchange. This second consecutive earnings miss due to credit issues led Jeffries analyst John Aiken to downgrade the bank, citing a worsened credit outlook. He noted that while growth in BMO’s U.S. operations is anticipated, it may not be enough to counterbalance the credit challenges.
For the latest quarter, the bank reported adjusted earnings of $2.64 per share, down from $2.94 per share a year earlier. Analysts had projected an adjusted profit of $2.76 per share, according to LSEG Data & Analytics.
Revenue for the quarter was $8.19 billion, up from $8.05 billion a year ago, while unadjusted profits rose to $1.87 billion from $1.57 billion last year. Despite better-than-expected results outside of credit provisions, concerns about the loan portfolio overshadowed these positives, according to Scotiabank analyst Meny Grauman. He observed that after a significant credit miss in the previous quarter, the market remained highly focused on credit issues, which continues to impact the bank’s shares.
