BMO's profit miss signals tough 2012

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Bank of Montreal is tempering expectations for the coming year after reporting an increase in fourth-quarter profit that relied heavily on its recent U.S. acquisition to bolster the lender's bottom line.

Canada's fourth-largest bank by assets became the only lender to miss analysts' expectations for the quarter on Tuesday, with a 21 per cent jump in earnings that disappointed investors and sent the shares down nearly 4 per cent – the biggest drop in close to a year.

BMO made $897-million or $1.34 a share in the quarter, compared to $739-million or $1.24 a year ago. Revenue rose 20 per cent to $3.88-billion.

BMO's profit numbers were helped substantially by the addition of Midwestern U.S. bank Marshall & Ilsley, which was purchased in a $4.1-billion deal that closed in July.

The Wisconsin-based operations contributed $111-million in profit during the quarter.

But the bank's executives are taking a less-optimistic view of 2012 than they were before. With increased exposure to the U.S. market, chief executive officer Bill Downe said the bank still expects growth. But the European debt crisis continues to hang like a dark cloud over the world's financial sector, and Mr. Downe held back from using any superlatives to describe his outlook.

"With respect to the economy, we're going to see moderate but acceptable growth," he said. "It will be a reasonable year for North America."

The earnings from the M&I deal helped mask what was a difficult quarter for BMO's capital markets division, which saw earnings decline to $149-million from $215-million.

Capital markets profits are under pressure across the sector in the fourth quarter, as banks see their fixed-income trading revenue depressed amid the sovereign debt crisis in the European Union.

"Markets were softer this quarter than they have been in a long time," BMO chief executive officer Bill Downe said in an interview. "But the biggest factor in our year was ... we've repositioned our U.S. business in a very fundamental way."

"The bank would have finished the year on an okay trend, but clearly the acquisition contributed to the bottom line. And I would go as far to as to say it's been a catalyst to momentum," Mr. Downe said.

Adjusted for one-time items, BMO made $1.27 a share, which fell short of the $1.31 analysts were expecting the bank to produce.

Even with BMO's disappointing quarter, Canada's five largest banks collectively made more than $6-billion in the fourth quarter, which was better than expected for a period that analysts thought would be bleak for profits, given the economic upheaval in Europe.

Over all, BMO's personal and commercial banking division made $600-million in the quarter, from $472-million a year ago. Canadian retail banking profits climbed slightly, to $426-million from $415-million. BMO's private client group made $150-million, an increase from $130-million a year ago.

National Bank Financial analyst Peter Routledge noted that the bank was also hit by higher loan losses and slower loan growth.

Provisions for credit losses, which is the amount of money banks set aside to cover bad loans, rose to $45-million, an increase of 15 per cent.

"While BMO reaped the benefits from a transformed U.S. platform ... credit quality weakened materially in the quarter [and ]personal and commercial loan growth remained slow," Mr. Routledge said in a note to clients.

As banks try to reassure investors over their exposure to Europe, BMO also provided more detail on its own situation, telling investors it has "modest" exposure to the most problematic countries.

BMO is carrying just over $10-billion in exposure to European countries, through lending, securities, derivatives and other transactions. However, the bank said only $203-million of that is direct exposure to the countries that are drawing the most concern – Greece, Ireland, Italy, Portugal and Spain. The figure is small compared to the bank's total assets of more than $400-billion.

About $5.06-billion of that exposure is from nations within the 17-member euro zone, but outside of those five countries. And of that, 91 per cent is linked to counterparty nations with a triple-A rating.