Bank of Montreal (BMO) has fortified its financial position by allocating more funds to cover potential loan losses and severance expenses amid the integration of Bank of the West, a move coinciding with a challenging period for US regional lenders.
In its fiscal third quarter, the Canadian bank reported an adjusted profit of C$2.04 billion ($1.89 billion), marred by weaker outcomes in its US personal and commercial division. However, the reported profit of C$2.78 per share fell short of the C$3.13 predicted by Bloomberg’s analysts.
The acquisition of Bank of the West by the Bank of Montreal took place slightly over a month before the collapse of Silicon Valley Bank in March.
This event caused alarm across the regional banking sector. This crisis resulted in heightened deposit costs and regulatory pressures. In the third quarter, Bank of Montreal’s net interest margin for its US personal and commercial division dipped to 3.8%, decreasing from 3.96% in the previous quarter.
Bank of Nova Scotia analyst Meny Grauman commented on the situation, noting that while BMO’s US margin pressure is a concern, it isn’t the most severe in the current quarter, and the bank’s valuation already accounts for considerable caution about the US outlook.
While Canada’s third-largest bank reported C$492 million ($361 million) in provisions for credit losses, almost 30% beyond analysts’ projections, a significant portion of this increase pertained to the US business. This adjustment in loan loss provisioning was particularly noticeable due to BMO’s focus on commercial loans, a factor that analysts had previously highlighted as a potential risk.
CEO Darryl White expressed confidence in the bank’s resilience and adaptability in a shifting landscape, affirming that the institution continues to deliver robust financial results. BMO handled legal expenses during the quarter, allocating C$83 million for legal provisions in capital markets.
Additionally, severance costs of C$162 million were incurred, including layoffs in BMO Capital Markets to address slower deal flow, reducing around 2.5% of the total workforce.
Despite the apparent disparity between reported earnings and analysts’ predictions, National Bank of Canada analyst Gabriel Dechaine noted that the results were not as far from estimates when excluding severance and litigation expenses. Furthermore, the bank benefited from a lower tax rate.
While the overall net interest margin experienced a slight decline of 1 basis point from the second quarter or two basis points on an adjusted basis, Bank of Montreal’s shares have declined by 7.1% year-to-date, a figure more unfavorable than the 4.1% drop of the S&P/TSX Composite Commercial Banks index as of Monday’s closing.