BMO results surpass expectations

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BMO easily beat analyst estimates for the third quarter in a row, thanks to fewer losses from troubled loans in the United States and fatter profit margins on both sides of the border.

Profits at the bank's U.S. lending business still fell 31 per cent, and BMO's results suggested that Canadian corporations continue to struggle with their debts.

But the overall earnings, which doubled those of a year ago, nevertheless kicked off earnings season with a bang, sending the bank's stock up 2.64 per cent Wednesday, to close at $60.26.

"We believe that BMO's results set a very positive tone for earnings this quarter," Barclays Capital analyst John Aiken wrote in a note to clients, adding that better credit quality should help all of the banks.

The strong showing from Bank of Montreal's capital markets group also bodes well for other banks, chiefly Royal Bank of Canada and National Bank of Canada, he said.

But analysts cautioned against reading too much into what BMO's results mean for the sector, because the bank's performance has outpaced the Street's estimates more than its rivals in recent quarters.

A number of factors gave BMO a lift, including continued high trading revenues. Analysts have been cautioning throughout the crisis that trading revenues, which tend to feed off volatility in the stock market, are unsustainable. But as the banks continue to report high figures the analysts have begun to change their tune.

BMO also benefited from higher mortgage refinancing fees in Canada. And, despite the bank's decision to offer a discount rate on mortgages in April that undercut many other banks, profit margins in the lending business were up from a year ago. (The second quarter ends April 30).

The banks began hiking mortgage prices in April, noting that their financing costs had risen. They signalled at the time that rates would continue to climb, as the banks sought to reclaim profit margins that were damaged by the financial crisis. But the financial uncertainty emanating from Greece actually pushed down funding costs for Canadian banks, and they have since begun ratcheting mortgage rates back down.

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BMO disclosed Wednesday that its exposure to Greece, Ireland, Italy, Portugal and Spain is mostly related to financial institutions for trade finance, lending and trading products. The bank said it considers its overall exposure to the countries to be "modest" at about $260-million (U.S.), or 1 per cent of its total capital.

BMO's wealth management business got a lift from stock market gains, but those same gains caused consumers to move money from their savings and chequing accounts into equities, taking a bite out of BMO's personal deposit balances.

While BMO's U.S. lending business saw its earnings drop $20-million (U.S.) from a year ago, to $45-million, chief executive officer Bill Downe said the financial reform act that the U.S. Senate passed last week will not impede BMO's U.S. bank.

In fact, he said it might give it an advantage. The bill corresponds to BMO's business model, Mr. Downe suggested, and will be detrimental to the U.S. credit card business, something that BMO isn't involved in.

"I think there are going to be some competitors that are just going to get squeezed out of some segments of the market," he said, adding that more opportunities will be created for potential takeovers of smaller regional banks.

"Aside from the damage that could be done to the wholesale business, which I think really would fall under the heading of random if it does occur, we feel good about the business model," Mr. Downe said.

BMO's chief risk officer, Tom Flynn, said the bank's U.S. loan losses are showing early signs of stabilization, but real improvement likely won't come until 2011.