Bank of Montreal is continuing its drive to get leaner, recording a $260-million pretax restructuring charge even as profit from its core operations rose sharply in recent months.
The charge arises from a plan to trim BMO’s work force, but not for lack of performance. Strong economic conditions have helped boost returns in most key areas, the bank’s credit portfolios look healthy, and it raised its quarterly dividend by three cents to 96 cents a share on Wednesday.
Second-quarter profit at BMO’s U.S banking arm rose 46 per cent from a year ago, to $348-million, helped in part by a US$24-million benefit from sweeping American tax cuts and lower loan losses. But even excluding those two factors, the division’s profit swelled by 22 per cent. At the same time, profit from the bank’s core Canadian personal and commercial banking unit increased 11 per cent, to $590-million.
The impetus for the restructuring is the bank’s lagging efficiency, which is less impressive than its peers and a nagging concern for some investors and analysts. In a speech at BMO’s annual meeting in April, chief executive officer Darryl White talked about “lightening our structure.”
The decision to take a charge “is part of our response really to a world that is changing,” largely due to advances in technology, said Tom Flynn, BMO’s chief financial officer. “And so part of what we’re doing is refreshing talent to bring people in who are more adept in technology.”
BMO’s adjusted efficiency ratio − an indicator that a bank earns significantly more than it spends − was 58.2 per cent in the second quarter, several percentage points higher than its largest peers.
“They’re obviously looking to bring that down more in line with the industry average,” said Rob Colangelo, a senior vice-president at ratings agency DBRS Ltd. “This is probably the starting point for that to happen.”
As a result, there will be an unspecified number of jobs lost, Mr. Flynn said in an interview, and much of the restructuring cost − which amounts to $192-million after tax − is related to severance pay. But he said BMO makes about 7,000 new hires annually, “and we’re changing the mix of skills that we have in the company.”
BMO’s last significant restructuring charge was recorded two years ago, totalling $132-million.
For the quarter that ended Apr. 30, BMO total profit was $1.25-billion, or $1.86 a share, unchanged from a year ago, largely owing to the restructuring charge.
Excluding that cost and adjusting for other items, BMO would have earned $2.20 a share. Analysts had expected adjusted earnings of $2.12 a share, according to Bloomberg LP.
The results predate BMO’s disclosure on Monday that it appears to have suffered a data breach, which may have exposed personal and financial information belonging to as many as 50,000 clients.
“We’re constantly updating and implementing advanced methods to protect our customers’ data,” Mr. Flynn said. “And while our defences are strong, there are sophisticated experts active in seeking ways to hack into individual, corporate and government systems around the world. And so our work continues in the area.”
Another area of concern for Canadian banks has been slowing growth in residential mortgages, as new federal regulations introduced in January make it tougher for some borrowers to qualify for uninsured home loans. BMO’s Canadian residential portfolio only grew by about 1 per cent, year over year. But that’s partly because BMO has been retreating from its use of third-party mortgage brokers, and home loans issued through its own channels grew by 4 per cent.
“It definitely is a slower growth than some of the other Canadian peers, but still in line with what we expect,” Mr. Colangelo said.
BMO’s wealth management division was also a key contributor in the second quarter, with earnings up 17 per cent to $296-million. But profit from capital markets fell 8 per cent to $286-million, when compared with a strong quarter a year ago.