(Toronto) BMO Financial Group shares fell nearly 9% on Wednesday after the bank reported lower-than-expected results amid higher loan loss provisions and U.S. growth woes .
The bank, which significantly increased its presence in the United States early last year with its US$16.3 billion acquisition of Bank of the West, argued that the results reflect a difficult environment in that country, as well as as the pressure put on Canadian borrowers by higher interest rates.
BMO manages credit risk well, but it is elevated compared to the previous quarter, said CEO Darryl White.
“Some individuals and businesses are affected by higher interest rates over a longer period of time and a slowing economy,” he said Wednesday during an earnings conference call.
In the United States, the banking sector has been under pressure since March last year, amid more moderate loan growth and increased competition on deposits, he noted.
The combination of these pressures led BMO to post a profit of $1.87 billion in its second quarter, up from $1.03 billion a year earlier, when results were hurt by tax-related charges. acquisition of Bank of the West.
On an adjusted basis, BMO says it earned $2.59 per diluted share, down from adjusted earnings of $2.89 per diluted share in the same quarter last year.
Analysts on average expected earnings of $2.77 per share, according to LSEG Data & Analytics.
BMO shares closed down $11.62, or 8.86%, at $119.48 on Wednesday on the Toronto Stock Exchange, despite raising its quarterly dividend by four cents to $1.55.
Deterioration in credit quality
According to results presented Wednesday, BMO’s provisions for credit losses for the quarter were $705 million. The total was down from 1.02 billion a year ago, when the initial provision of 705 million linked to Bank of the West’s loan portfolio.
Much of last year’s increase was in provisions on the performing loan portfolio, which are more automatically taken from loans as a precaution. The last quarter, however, saw a significant growth in provisions on impaired loans, where the bank saw a deterioration in credit quality and can no longer expect full repayment of the loan.
Provisions for bad loans totaled 658 million, up from 243 million last year.
Losses on impaired loans included $247 million from personal and professional banking in Canada, up $44 million from the previous quarter, due to increased credit card defaults and insolvencies. increased consumer demand, Piyush Agrawal, head of risk management, said on the conference call.
He said the bank expects provisions on impaired loans to remain at current levels over the next two quarters due to reduced expectations for rate cuts from the Bank of Canada, a situation which is having a greater effect on consumers than some expected.
“There is the exogenous factor of insolvencies or Canadian proposals that have been and continue to be surprisingly better than general expectations,” said Mr. Agrawal.
Volumes in the United States
In the United States, provisions totaled 288 million, notably showing pressure from the trucking sector which has been struggling for some time, he said.
“For 18 months you have seen freight rates remain at a historic low, volumes have not recovered. If you look at the US tonnage index, it’s a low point. And resale values, due to oversupply, have also been affected. »
Overall, provisions on bad loans were 25% higher than analysts expected, said Meny Grauman, an analyst at Scotiabank.
“The scenario of higher interest rates for longer is a reality and appears to have a greater impact on credit performance than Wall Street, or frankly management teams, anticipated,” he said. he declared in a note.
“The question is where expectations (for credit loss provisions) go from here, and it is reasonable to believe they will be higher,” he added.
Overall, banking revenues totaled 7.97 billion, up from 7.79 billion in the same quarter last year.
BMO’s personal and commercial banking operations in Canada brought in $872 million in the quarter, up from $819 million in the same quarter last year, while its personal and commercial banking operations in the United States brought in $543 million. million, down from 731 million.
The bank’s wealth management activities generated 320 million, an increase compared to 240 million a year earlier. BMO’s capital markets business brought in $459 million, up from $370 million.
BMO’s business services sector reported a loss of $328 million in the second quarter, compared to a loss of $1.13 billion in the same quarter last year.