Bank of Montreal's latest quarterly results served as a sharp pinch for those who had been lulled into a slumber by the recent rally in bank stocks.
Despite strong wealth management earnings, encouraging Canadian loan growth and a solid profit of $1.1-billion for the quarter, BMO's results included rising provisions for bad loans and a deteriorating outlook for U.S. personal and commercial banking.
Canadian bank stocks have surged since June. But the results from BMO, the first of the Big Six banks to report this quarter, gave investors reasons to reconsider their outlook. The bank's share price fell 4.5 per cent, while other major lenders saw their stocks slide by an average of 1.4 per cent.
The U.S. forecast is particularly important for BMO, which reported record profit just three months ago. Canadian bank executives have long acknowledged that the torrid pace of borrowing in Canada is bound to slow as household indebtedness hits record levels. But investors are counting on U.S. growth to help offset cooling on this side of the border. However, profit from the U.S. division sank to $106-million this quarter, down 24 per cent from the previous year.
BMO executives said there is little reason to worry, pointing to the strength of the bank's Canadian personal and commercial banking operations, which posted a record profit of $1.9-billion in 2013.
A recent spike in U.S. loan-loss provisions is just a blip, they said.
"I do not view the [loan-loss provision] increase as symptomatic of an underlying trend," chief risk officer Surjit Rajpal said on a conference call, adding that the U.S. economy continues to recover, allowing borrowers to find new business and repay their debts.
BMO said provisions for commercial loans gone sour spiked "primarily due to a few accounts," rather than rising across the entire U.S. lending book.
Meanwhile, loan-loss provisions for personal lending in the United States crept higher because some borrowers declared bankruptcy, but many continue to make their mortgage payments, the bank said. Provisions for losses on commercial lending grew in Canada too, but BMO attributed that to one large account.
"Experience counsels that we should take any rise in [loan-loss provisions] as a potential early warning indicator for troubles ahead," National Bank Financial analyst Peter Routledge noted. "That said, we do not find any compelling evidence of an approaching turn in the credit cycle."
Still, investors have reason to fret. Net interest margins – the difference between the rates at which BMO borrows and lends money – fell for the fifth straight quarter in the United States and the seventh straight quarter in Canada. Even though BMO is lending more money, the profit it makes on each loan is shrinking.
The bank has also shown it needs to tighten its grip on costs, cutting just under 1,000 jobs last quarter.
Canadian personal and commercial banking operations proved again to be a boon to the bottom line. The unit's profit amounted to $469-million, a healthy 6-per-cent gain from 2012, as personal and business borrowing showed solid growth.
BMO's wealth management operations were also a success story for the second straight quarter, as the unit posted yet another record profit of $312-million. While $121-million of that came from a one-time gain tied to an investment in a U.S. wealth manager, the core business performed well, as hot markets boosted the value of assets under management and convinced more investors to invest additional money.
After holding off on a dividend rise last earnings season, BMO raised its quarterly payout by 2 cents a share, bringing it to 76 cents.