Bank of Montreal in Toronto.Fernando Morales/The Globe and Mail
The improving economy is beginning to lift bank results.
After a string of quarterly results bruised by mounting losses on loans, Bank of Montreal set aside less for soured loans in the third quarter than it did a year ago, signalling to investors that the most important part of the Canadian banking sector's business - personal and commercial lending - is on the mend.
Bank of Montreal kicked off the banks' earnings season Tuesday with profit that was 6.9 per cent higher than a year ago, topping analysts' forecasts.
BMO's stock jumped 6.71 per cent and shares of the rest of the Big Five banks each rose at least 3 per cent on hopes that the improvement will be sector-wide.
For the first time in two years, Bank of Montreal reported no increase in a key measure of the number of Canadian borrowers who have been struggling to pay their credit card, mortgage or loan bills. And the few writedowns or charges that the bank took were so small as to be insignificant to its earnings.
"We aren't calling a bottom here, what we are saying is that we are seeing moderation in the negative trend that we've seen," said BMO chief risk officer Tom Flynn.
Based on what the bank is seeing now, there is "really no risk of a sharp spike" in bad loans, Mr. Flynn said.
BMO's core Canadian lending business posted a profit that was up 13 per cent from a year ago, supporting the increase in BMO's total earnings of $557-million.
Undoubtedly, challenges remain, both at BMO and other banks. Most of the concern centres around the United States, where the consumer is in much rougher shape because of the struggles of the housing sector, and rivals like Toronto-Dominion Bank and Royal Bank of Canada have big businesses.
BMO's U.S. personal and commercial lending business is still struggling with a higher rate of troubled loans, signalling that Canadian banks will continue to have problems south of the border. The bank's profit from that business fell 16 per cent despite higher gains on the sale of mortgages and better profit margins.
BMO chief executive officer Bill Downe said it appears that the economic environment is starting to make the shift from challenging to normal. While the United States might not return to a healthy growth rate until 2011, the short-term economic outlook is more positive in Canada where borrowers have less debt, he said.
Importantly, the bank left its dividend unchanged. While few bank watchers were expecting any dividend cuts this quarter, the recent cut at Manulife Financial had left some investors edgy and Internet newsletters had recently been making much of the fact that BMO was the bank most likely to reduce its dividend to bolster its capital.
With the economy and results improving, the pressure may soon instead be on executives to consider ways to use up some of the capital they've been stockpiling by making acquisitions or even considering stock buybacks.
All of the big banks have been raising capital to boost their ratios well above the minimum level, which investors demanded during the crisis. But too much capital can depress profitability, so once it's no longer needed, the banks will need to find ways to put the money to work.
In a presentation to analysts, BMO highlighted the fact that it now has $6.4-billion in excess capital above the amount required to maintain a Tier 1 capital ratio of 8 per cent. The Tier 1 ratio, a measure of the amount of money that has been set aside to cover risks, is the key indicator of a bank's financial cushion and Canadian regulators require it to remain above a floor of 7 per cent. BMO's currently sits at 11.71 per cent, up from 10.7 per cent in the prior quarter, although some of that growth came from a decrease in the value of the bank's risky assets caused by changes in the value of the U.S. dollar.
Mr. Downe said he does believe capital levels will fall again as the environment normalizes, at which point there will be opportunities to expand.
"It would be a reasonable thing for us to look at doing FDIC-assisted transactions," where the U.S. government eases the purchase of a bank by taking on some of the risk associated with its troubled loans, Mr. Downe said. "I hope that we'll see a good pipeline of transactions. So far there really haven't been that many."