Bank of Montreal’s drive to get leaner is taking a heavy toll on short-term profit, as the bank took the latest – and largest – in a series of restructuring charges that will speed up cost-cutting and lead to job losses.
The Toronto-based bank recorded a $484-million charge before taxes, most of which is earmarked for severance pay as BMO prepares to cut about 5 per cent of its staff of 45,513. That puts more than 2,200 full-time equivalent jobs on the chopping block and will curb new hiring, on top of 810 positions BMO has already slashed since the third quarter. Costs related to real estate make up the rest of the charge.
Fiscal fourth-quarter profit would have risen 5 per cent without the restructuring costs, but instead fell 30 per cent compared with a year earlier, to $1.19-billion.
Canada’s fourth-largest lender has made a high priority of improving the discipline and efficiency of its spending, where it has lagged behind peers, while investing heavily in new digital technology. Other large Canadian banks have backed off major restructurings since the sector booked a wave of charges in 2015 and 2016, but BMO has taken charges each year since, including one worth $260-million in 2018.
This time, chief executive officer Darryl White says BMO won’t return to the well any time soon. “We’re confident in telling you that we’ll retire this play from our playbook,” he told analysts on a Tuesday conference call.
Mr. White said the bank is “on a new path,” demanding greater “discipline" and “accountability” from managers as they decide where to invest in new opportunities, and where to slash costs. “That’s a very clear message to the entire organization in terms of how we expect to manage ourselves going forward,” he said.
Yet shares in BMO fell 2.1 per cent on the Toronto Stock Exchange on Tuesday. And after five restructuring charges in four years, at a cost of roughly $800-million after tax, investors may be showing signs of fatigue, according to National Bank Financial Inc. analyst Gabriel Dechaine.
“The divergence from other banks ... raises concerns that BMO has structural cost issues, which is a reasonable conclusion," he said, though cost savings from restructuring should boost BMO’s performance in the short term.
Six months ago, BMO wasn’t considering another large restructuring charge. But as rate cuts by the United States Federal Reserve put pressure on BMO’s U.S banking margins, and economists lowered U.S. GDP forecasts amid trade tensions, Mr. White decided the bank had to be more aggressive.
“We’re not expecting a big shift in the environment, but there are pockets of pressure," said chief financial officer Tom Flynn.
This latest restructuring affects all corners of the bank, and is expected to reduce expenses by $200-million in the 2020 fiscal year, then $375-million each year after that. That will help BMO as it chases a target to improve its efficiency ratio – a measure of expenses relative to profits – to 58 per cent by 2021. BMO has made headway, driving the ratio down by 130 basis points over two years, to 60 per cent in the latest quarter. (100 basis points equal one percentage point). “I wouldn’t say the target’s an easy target," Mr. Flynn said, but it’s “achievable.”
The focus on restructuring overshadowed an otherwise solid set of fourth-quarter results for BMO, driven by a 6-per-cent rise in Canadian retail banking profit. For the three months that ended Oct. 31, BMO earned $1.19-billion, or $1.78 a share, compared with $1.7-billion, or $2.58 a share, in the same quarter last year.
Excluding restructuring costs and one-time items, BMO said adjusted earnings per share was $2.43. Analysts expected $2.41 a share, according to Refinitiv.
Provisions for credit losses, which is money set aside to cover bad loans, spiked 45 per cent higher to $253-million, after plunging to unusually low levels a year ago. That matched analysts’ expectations, but “there are some areas where we have some concerns," most notably in commercial loans to the oil and gas, agriculture and manufacturing sectors, said James Shanahan, an analyst at Edward Jones & Co.
"The market’s reacting to the confusion around the [restructuring] charge, and probably the credit issues,” he said. "Because if they were just looking at the quarter, the results were fine.”
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