BMO kicks off bank results with profit boost, dividend hike

Bank of Montreal reported higher fiscal second-quarter profit and raised its dividend to lead off earnings season for Canada’s big banks, even as slower-than-expected business activity in the U.S. dragged on its results.

Toronto-based BMO, the country’s fourth-largest bank by assets, is the first of Canada’s major lenders to report results for the quarter. Expectations were less lofty following a first quarter in which the six big banks all beat forecasts, but a few key metrics disappointed analysts.

“Weak growth in BMO’s retail businesses,” as National Bank Financial Inc. analyst Gabriel Dechaine described in a research note on Wednesday, dogged an otherwise solid set of core results. The main culprit was higher provisions for credit losses – or money the bank sets aside to cover soured loans – particularly in the bank’s U.S. arm.

BMO earned $1.25-billion or $1.84 a share for the quarter that ended Apr. 30. That was up 28 per cent from $973-million or $1.45 a year earlier.

Adjusted to exclude certain items, BMO said it earned $1.92 a share. Analysts polled by Bloomberg were expecting adjusted profit of $1.93.

“Perhaps we had expected too much,” said Darko Mihelic, an analyst at RBC Dominion Securities Inc., said in a research note. He also noted that retail banking returns were “light” in both Canada and the U.S., prompting “a mildly negative view of [second-quarter] results.”

On a positive note for shareholders, BMO increased its quarterly dividend by 2 cents to 90 cents a share, as several analysts had expected it would.

Profit in BMO’s core Canadian banking operations rose 1 per cent to $531-million, while capital markets profit rose 12 per cent to $321-million. In the bank’s wealth-management arm, profit surged 86 per cent from a year earlier to $251-million.

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“BMO delivered good results in the quarter,” chief executive officer Bill Downe said in a statement, adding: “We remain confident in our ability to grow and create value in an evolving environment.”

The U.S. personal and commercial division, which operates as BMO Harris Bank, suffered a 7-per-cent decrease in profit from a year ago to $248-million, due largely to the higher provisions for losses set aside on commercial loans.

“Business and consumer confidence is strong, and while there has been a moderation in loan and deposit growth in the United States reflective of slower-than-anticipated business activity in the first calendar quarter, we are well-positioned to continue to build on the strength of our U.S. franchise,” Mr. Downe said.

The biggest surprise of the second quarter was BMO’s overall provisions for credit losses, which climbed to $259-million, an increase of $58-million from the same period last year. The bank attributed the spike mostly to its U.S. personal and commercial operations, and also to lower credit recoveries in its corporate services division.

“While the lift in provisions is not likely to be well received, we note that there was not necessarily a marked deterioration in credit quality,” said John Aiken, an analyst at Barclay’s Capital Canada Inc., in a note.

For the most part, analysts are taking BMO’s disappointing profits in its Canadian and U.S. retail operations in stride. But it is not clear investors will be so understanding – the bank’s share price was down 2.5 per cent in early trading on the Toronto Stock Exchange.

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“Neither business would appear to have lasting issues, but the results this quarter will likely weigh on the near-term outlook,” said Robert Sedran, an analyst at CIBC World Markets Inc.

Royal Bank of Canada, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce will report second-quarter results on Thursday, while Bank of Nova Scotia and National Bank of Canada disclose their results next week.

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