Noah Zivitz

Managing Editor, BNN Bloomberg

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BMO Financial Group cited "challenging conditions" Wednesday as it reported quarterly profit that barely exceeded expectations while also nudging up its quarterly dividend.

BMO's net income in the fiscal second quarter, which ended April 30, more than tripled to $4.76 billion from $1.3 billion a year earlier. The net profit received a significant boost because of accounting measures tied to revenue associated with BMO's pending acquisition of Bank of the West. On an adjusted basis, BMO earned $3.23 per share; analysts, on average, were expecting $3.22 in adjusted per-share profit.

The bank separately said its quarterly dividend will rise to $1.39 per common share from $1.33 as of Aug. 26.

“Over the past few quarters BMO has gotten into the habit of delivering peer-leading performance on earnings day, and our first impression of these results is that this streak is broken,” wrote Meny Grauman, who covers the sector for Scotiabank’s global equity research team, in a report to clients titled “Results go from Great to Good.”

Overall credit quality deteriorated in the quarter as BMO booked $50 million in provisions for loans that could go bad, snapping a streak of three straight quarters when cash was freed up from reserves.

In a report to clients, Barclays Analyst John Aiken stated he thinks that may open up BMO to some questions.
“While relative performance will be dependent on what its peers report through the remainder of the week, we believe there may be some pressure on its valuation, although this will likely be offset by the higher than expected dividend increase,” he wrote.

BMO's core Canadian personal and commercial division's net income surged 21 per cent year-over-year to $940 million. However, profit deteriorated compared to the previous quarter when BMO registered $1 billion in net income. Loan loss provisions more than doubled in the period to $54 million and the average balance of residential mortgages inched up to $118.48 billion from $117.19 billion.

The bank's U.S. division saw profit rise eight per cent year-over-year to $464 million. Similar to the Canadian division, however, profit fell compared to the fiscal first quarter.

BMO's U.S. unit is poised for a significant expansion, as the bank awaits final approvals to proceed with the US$16.3-billion takeover of Bank of the West. That deal was announced last December, and was touted by BMO as a springboard to accelerate its expansion in the United States.

BMO said Wednesday that Bank of the West had US$95 billion in assets, US$58 billion in loans, and US$80 billion in deposits as of March 31, and reiterated that the transaction should close by the end of this year. The U.S. Federal Reserve and the Comptroller of the Currency have scheduled a public meeting on July 14 to gather input on the deal.

Similar to the results that Bank of Nova Scotia reported earlier Wednesday, BMO's capital markets business was a profit drag in the latest quarter as the unit's net income slid almost 20 per cent year-over-year to $448 million. BMO attributed the profit erosion to higher expenses and provisions for loan losses.

"We continued to deliver good financial performance this quarter, driven by broad-based customer loan growth and strong credit quality in our North American P&C businesses, and solid results in our market sensitive businesses even amid more challenging conditions," said BMO Chief Executive Darryl White in a release.