A strong showing in capital markets boosted Bank of Montreal's bottom line in its latest quarter, with management expressing confidence that trend will continue.
Profit in BMO's capital markets division increased 18 per cent year-over-year to $321-million for the three months ended July 31 – a result that sets an upbeat tone for other bank-owned dealers this earnings season.
Fees from underwriting and advisory services fell slightly during the fiscal third quarter, but trading revenue saw a sizable increase. Revenue in that segment rose 20 per cent to $435-million.
"While trading revenue fell short of our estimates … this result still represents a material improvement over the average of $377-million reported in the prior eight quarters," Peter Routledge, an analyst with National Bank Financial, wrote in a note to clients.
In a conference call with analysts on Tuesday, management expressed optimism that trading revenue in excess of $400-million a quarter is sustainable. "I would expect if markets remain constructive, we would be able to continue to perform at or around these levels," Darryl White, head of BMO's capital markets division, said during the call.
Mr. White said BMO is making strides in product development. In particular, he highlighted inroads into a line of fixed-income trading known as SSA (Supranational, Sovereign, Agency), which is starting to pay off.
"If you looked at it a year ago, you'd see that we were somewhere around 20th in the global league tables. Today we're around 13th," he added.
Strength in capital markets for BMO wasn't confined to the home market. Profit at its U.S. capital markets division rose by $23-million to $69-million. BMO recently bolstered its footprint in the United States by acquiring Greene Holcomb Fisher, a Minneapolis-based M&A advisory firm. The deal added more than 30 bankers to its roster.
Royal Bank of Canada reports its third-quarter results early Wednesday, and there's reason to expect a strong performance from it, too, in capital markets.
"We consider BMO's results as a favourable signal for the entire sector in this regard, which reiterates the growth prospects and quality of earnings in this business line," Mr. Routledge said. "We have long argued that revenues and earnings from this business line will grow in an environment of heightened, but not toxic, volatility."
There was plenty of volatility during the quarter, including the shock Brexit vote in late June that rocked equity markets around the world.
BMO's robust capital markets results stand in stark contrast to some of the larger independent dealers on Bay Street. In early August, Canaccord Genuity Group Inc., Canada's largest publicly traded boutique, reported a small profit for the quarter that ended on June 30, after posting three straight losses.
GMP Capital Inc., meanwhile, has lost money in its past four quarters. GMP, the country's second-largest boutique, recently announced it was buying fellow independent FirstEnergy Capital Corp. for $99-million in an attempt to rebuild its investment banking and trading presence in the oil patch.
Niall McGee