BMO profit drops on hurricane claims as Big Six wrap up strong year

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It took a string of major hurricanes to dent Bank of Montreal's fourth-quarter earnings, capping an otherwise strong year that revealed few weaknesses in the Big Six banks' capacity to churn out greater profits.

Canada's fourth-largest lender absorbed a $112-million charge on reinsurance claims stemming from a trio of damaging storms that battered the Caribbean and southern United States, contributing to a 9-per-cent dip in profit compared with a year ago.

Even so, BMO raised its quarterly dividend by 3 cents, recorded steady underlying growth in its core Canadian business and managed a 10-per-cent bump in profit for the full fiscal year, riding strong currents from rising interest rates, healthy credit conditions and generous economic growth.

Now, the task ahead of Canada's largest banks is to carry that energy into 2018. Projections for low unemployment and healthy economic growth in Canada and the United States should help, and banks keep tightening the screws on costs, freeing up cash to reinvest in technology and automation. But the outlook is clouded by an expected slowdown in mortgage growth because of tougher stress testing and continued uncertainty over the outcome of fraught free-trade negotiations.

"We feel good and bullish about the economic growth prospects and, I would say, sentiment both on the business side and the consumer side heading into next year," Tom Flynn, BMO's chief financial officer, said in an interview on Tuesday.

But he added: "There are some things that we're watching carefully," most notably talks to redraw the North American free-trade agreement (NAFTA).

Most of Canada's big banks have played down the potential impact of new mortgage underwriting rules, which will make it harder for some borrowers to qualify for uninsured home loans. About 10 per cent of the mortgages banks currently write would have failed to qualify under the new standard, which takes effect Jan. 1. Some borrowers will adjust their expectations to qualify, so Royal Bank of Canada and Bank of Nova Scotia predicted they may only originate about 5 per cent fewer mortgages come the new year.

Mr. Flynn also predicted that new home loans issued by BMO might dip by 5 per cent to 10 per cent, but cautioned that it's "hard to handicap" ahead of time.

Provisions for credit losses – or the money banks set aside to cover bad loans – edged higher at some banks in the fourth quarter. Toronto-Dominion Bank reported a 5.5-per-cent increase as expected losses on U.S. credit card and auto loans swelled heading into the holiday shopping season. But RBC's provisions fell by 35 per cent and loan losses among Canada's banks still look benign, despite persistent concerns about high consumer debt and housing price increases in Toronto and Vancouver.

"This is a very low point in the credit cycle," RBC chief financial officer Rod Bolger said last week. "But at the same time, we don't see economic headwinds in the short to medium term that would cause it to reverse significantly."

Central bank rate hikes continue to give commercial banks a reason to be optimistic, as margins that had long been squeezed begin to expand. The U.S. arms of most Canadian banks reported better net interest margins and higher profit, despite minor hiccups – even as BMO posted record profit from its American arm, a weaker U.S. dollar eroded the value of those gains in Canada.

U.S. banks can also expect a boost from a sweeping set of tax cuts working its way through America's legislative ranks. The final bill, which could pass before Christmas, is likely to drop the corporate tax rate from 35 per cent to about 20 per cent, providing what Mr. Flynn described as "a nice, helpful bounce" to the U.S. earnings flowing to Canadian banks.

"It looks like they'll be successful at taking the rate down to the low 20s, which will absolutely help our U.S. bottom line," he said.

And while other Canadian banks focus on the United States, Scotiabank sealed a deal this week to buy a 68-per cent stake in Chilean bank BBVA Chile from Banco Bilbao Vizcaya Argentaria, S.A., for $2.9-billion. The deal is expected to close in the third quarter of 2018, and when merged with Scotiabank Chile, the combined bank will be Chile's third-largest non-state-owned lender, adding scale to its existing Latin American operations.

Relative to analysts' estimates, some banks' profits sailed past expectations while others fell short. That prompted sharply different responses from investors – CIBC's shares were trading 4 per cent higher on Tuesday than they were last Wednesday, while TD's stock dropped about 3.5 per cent over the same stretch.

For the quarter that ended Oct. 31, BMO earned $1.22-billion, or $1.81 a share, compared with $1.35-billion, or $2.02 a share, in the same quarter last year.

Adjusted to exclude certain items, BMO earned $1.94 a share, shy of the $1.98 consensus expectation among analysts polled by Bloomberg LP. But the reinsurance claims due to hurricanes dragged earnings per share down by 17 cents.

Profit from its Canadian retail banking operations was $624-million, up 6 per cent from a year earlier. But as new chief executive officer Darryl White takes charge, BMO still saw fit to take a $59-million restructuring charge. "I think about restructuring as continuous improvement," Mr. White said.