Bank of Montreal promised investors that a recent dent in U.S. profits was just a temporary blip. The lender's solid first-quarter earnings proved management was not kidding around.
The last time BMO reported quarterly results, a big drop in U.S. personal and commercial (P&C) banking earnings sent the bank's shares plummeting 4.5 per cent in one day. This earnings season, the same unit saw its profit rebound to normal levels, propelling BMO to a $1.1-billion profit that beat analysts' expectations.
Despite the initial worries in December, chief executive officer Bill Downe said it was simply a matter of time before investors came around. BMO laid out a road map for its U.S. arm in January, and repeatedly stressed that the previous earnings season was an outlier. "This quarter is essentially a confirmation of that fact," he said in an interview.
With the U.S. concerns allayed, investors are now able to focus on encouraging results from Canadian personal and commercial banking, as well as from capital markets. There is also a bigger spotlight on total revenue, which increased by $310-million, or 8 per cent, aided in part by a sinking Canadian dollar.
However, BMO still has work to do. The bank has yet to prove it can deliver meaningful earnings growth from quarter to quarter, with its profits hovering around current levels for more than a year.
There are also questions as to whether the U.S. P&C unit can boost the bank's bottom line in the near term. "We would base the rationale for purchasing BMO's common shares today on the operating performance in Canadian P&C and BMO's capital-markets-related business segments," National Bank Financial analyst Peter Routledge wrote in a note to clients.
Despite fears of a slowdown, BMO's Canadian personal and commercial banking arm reported total loan growth of 10 per cent in the first quarter, translating into an earnings gain of 8 per cent from a year earlier. BMO benefits from a heavy exposure to commercial loans – the bank has a 20-per-cent market share in this category – and demand for these loans is expected to be heavy all year. "It isn't a surprise to us that we're having this kind of growth," chief operation officer Frank Techar said on a conference call.
BMO's capital markets arm was also a bright spot, posting a profit of $277-million, aided by a sudden jump in U.S. revenue. The bank reported healthy trading revenue as well as solid underwriting and advisory fees.
Wealth management reported sizable earnings of $175-million, but the unit's profit cooled after two exceptionally strong quarters – the last of which was aided by a one-time gain, pushing profit to $311-million. The division's bottom line will likely get a sudden boost in the near future, provided BMO receives the necessary approvals for its $1.3-billion acquisition of F&C Asset Management, which was announced during the first quarter.
The bank's bottom line was also boosted by a drop in provisions for credit losses, which fell to $99-million in the first quarter from $178-million a year ago. The U.S. unit reported noticeable improvements on this front, following a shaky fourth quarter.
For the rest of the year, investors will keep an eye on BMO's U.S. personal and commercial banking arm, which is based in the Midwest. The regional economy has been slow to recover from the financial crisis, but Mr. Downe recently described 2014 as the likely "inflection year" for the unit.
BMO's profit amounted to $1.58 a share, up 5 per cent from the first quarter of 2013. After adjusting for one-time items, the quarterly profit came in just a tad higher, amounting to $1.61 a share. Analysts estimated adjusted earnings of $1.52 per share.
BMO left its dividend unchanged at 76 cents a share.