BMO tops expectations even as profit slips on higher costs, more loan-loss reserves

Bank of Montreal BMO-T reported first-quarter earnings that beat analyst expectations as it set aside fewer loan loss provisions than anticipated, while profit edged lower as it shifts to integrating Bank of the West.

BMO was the second major Canadian bank to report earnings for the fiscal first quarter. The bank earned $247-million or 30 cents a share in the three months that ended Jan. 31. That compared with $2.93-billion or $4.43 in the same quarter last year.

Adjusted to exclude certain items, the bank said it earned $3.22 a share. That edged out the $3.18 analysts expected, according to Refinitiv.

The bank’s earnings for the quarter were also affected by a large, unusual item. It had a loss of $1.46-billion from a hedging strategy designed to offset the impact of interest-rate changes on the closing cost of its $17.1-billion deal to acquire California-based Bank of the West. But in the previous quarter, the bank recorded a $3.34-billion gain on the same hedge. BMO closed the deal on Feb. 1, after the first quarter had ended.

Canadian Imperial Bank of Commerce reported lower profit last Friday that still topped analyst estimates, while Bank of Nova Scotia posted earnings later Tuesday that missed expectations. Royal Bank of Canada and National Bank of Canada announce results on Wednesday, followed by Toronto-Dominion Bank on Thursday.

BMO’s total revenue fell to $6.47-billion from $7.72-billion in the same period a year prior. Expenses climbed to $4.42-billion from $3.85-billion. Excluding certain items, the lender posted negative operating leverage – the industry’s term for expenses outpacing revenue – of 6.4 per cent.

BMO chief financial officer Tayfun Tuzun said the jump in expenses largely owed to employee costs and technology investments.

“In the second half of this year, we’re are expecting a downshift in our expense growth because we are now managing our expenses dynamically in line with the revenue environment,” Mr. Tuzun said in an interview.

Its purchase of California-based Bank of the West closed on Feb. 1 – about three months later than BMO had expected. As a result of the delay, BMO now expects the deal to boost adjusted earnings per share by 7 per cent in its 2024 fiscal year, down slightly from the 8-per-cent gain it had initially estimated. Even so, the bank still says it will achieve US$670-million in cost savings as it integrates the U.S. bank.

“In the early days of owning the asset, my confidence level has gone up on those revenue synergies,” chief executive officer Darryl White said on a conference call with analysts.

In the quarter, BMO set aside $217-million in provisions for credit losses – the funds banks set aside to cover loans that may default. That was lower than analysts anticipated, but higher than the $99-million in provisions that the bank recovered in the same quarter last year.

Profit from Canadian personal and commercial banking was $980-million, down 2 per cent from a year earlier, as higher expenses and loan loss provisions offset an increase in revenue driven by higher net interest margins. Net interest in the bank’s U.S. arm was up 3 per cent to $698-million on a strong U.S. dollar even as higher revenue was offset by expenses and provisions for credit losses.

Capital markets profit fell 29 per cent to $503-million as investment banking and global markets activity slumped from the previous year’s torrid pace. And the wealth management division generated $277-million of profit, down 12 per cent as revenue fell amid global market volatility.