Problems in BMO's loan portfolio again weigh on the bank's quarterly results

By Ian Bickis, The Canadian Press, August 27, 2024.

BMO Financial Group reported third-quarter profit of $1.87 billion as provisions for loan losses rose from a year earlier. The BMO Bank of Montreal logo is seen on Tuesday, April 2, 2019, at the BMO Nova Centre in Halifax, home to the bank's headquarters and support services in the Atlantic Canadian provinces. THE CANADIAN PRESS/Andrew Vaughan

TORONTO – Problems in BMO Financial Group's loan portfolio have again weighed on quarterly results, raising concerns among analysts that the bank is becoming an outlier in this credit cycle. The bank on Tuesday reported that provisions for loan losses were $906 million in the third quarter, up from $492 million a year earlier, as it reported adjusted profit that was lower than a year ago. Chief Executive Darryl White said the level of provisions for loan losses did not meet the bank's expectations and that it expects those provisions to remain elevated in the near future. “The combination of persistently high interest rates, economic uncertainty and changing consumer preferences has had an acute impact,” White said. The bank stressed that while some segments such as transportation and commercial loans have been under pressure, the overall increase in potential losses was not concentrated geographically or by sector. Instead, he said, it's more of a general unwinding of the unusual lending environment caused by the pandemic, in which borrowers who received low rates and free money through government stimulus programs are being hit by the higher rates and the consumer slowdown. “It exposes a lot of problems that can resurface later,” White said. While the Bank of Canada has already started cutting its benchmark interest rate and the U.S. Federal Reserve is expected to start doing so soon, the strain will take time to ease and some companies will struggle, he said. “In some of these cases, it's just too late. And so what we're seeing is, you know, a faster increase with higher losses than we've seen before.” Chief Risk Officer Piyush Agrawal said the change in provisions is difficult to predict from quarter to quarter because of increased unpredictability. “That's hard to predict,” he said. “You go through a cycle where you have a company for sale with 10 bidders and suddenly at the end there's nobody there, they all leave.” The increase in provisions in the third quarter pushed the bank's ratio of non-performing loans to net loans to 0.5 percent, up from 0.21 a year ago and 0.41 percent in the second quarter. The increase in provisions for the third quarter came after the bank already reported an unexpected increase in the last quarter, which sent the share price falling nearly nine percent that day. On Tuesday, the bank's shares were trading at a loss of just over five percent on the Toronto Stock Exchange in mid-morning trading. The second earnings miss due to credit problems prompted Jeffries analyst John Aiken to downgrade the bank due to a deteriorating credit outlook. “While we expect underlying growth in BMO's U.S. platforms to accelerate, we no longer believe this will be enough to offset credit headwinds.” The bank reported adjusted earnings of $2.64 per diluted share in the latest quarter, compared with adjusted earnings of $2.94 per diluted share in the same quarter a year ago. Analysts on average had expected BMO to post adjusted earnings of $2.76 per share for the quarter, according to LSEG Data & Analytics. Revenue for the quarter was $8.19 billion, compared with $8.05 billion in the same quarter a year ago. Unadjusted earnings were $1.87 billion, up from $1.57 billion a year ago. While results outside of loan provisions looked better than expected, they were not enough to outweigh concerns about the bank's loan book, Scotiabank analyst Meny Grauman said in a note. “After a big credit-related miss in the second quarter, the market was laser-focused on credit in the lead-up to third-quarter reporting, and it's unfortunate that this is where the problems lie again,” he said. “The bottom line is that fears that BMO is actually the outlier of this credit cycle will continue to weigh on shares.” This report by The Canadian Press was first published August 27, 2024. Companies in this story: (TSX:BMO) 24
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