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BMO results miss expectations due to rise in non-performing loans

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TORONTO — Shares of BMO Financial Group came under pressure after the bank reported results that fell short of expectations due to higher provisions for loan losses and problems with U.S. growth. The bank, which has significantly expanded its U.S. business,

TORONTO — Shares of BMO Financial Group came under pressure after the bank reported results that fell short of expectations due to higher provisions for loan losses and problems with U.S. growth.

The bank, which significantly expanded its presence in the U.S. early last year through the $16.3 billion acquisition of Bank of the West, said the results reflected a difficult environment in the U.S. as well as pressure on Canadian borrowers from higher interest rates.

BMO is managing credit risk, but it is elevated compared to last quarter, said CEO Darryl White.

“Some individuals and businesses are affected by persistently high interest rates and the weakening economy,” he said on Wednesday during a conference call on quarterly results.

In the US, the banking sector has been under pressure since March last year due to subdued credit growth and increased competition for deposits, he said.

Due to these combined charges, BMO reported a profit of $1.87 billion in the latest quarter, compared to $1.03 billion in the year-ago quarter, when results were impacted by charges related to the acquisition of Bank of the West.

On an adjusted basis, BMO said it earned $2.59 per diluted share, down from adjusted earnings of $2.89 per diluted share in the same quarter last year.

According to LSEG Data & Analytics, analysts on average had expected earnings of $2.77 per share.

Despite a four cent increase in the quarterly dividend to $1.55, BMO shares were trading at $8.59, or 6.55 percent, lower at $122.51 on the Toronto Stock Exchange this morning.

The failure came after BMO set aside $705 million in provisions for loan losses for the quarter, up from $1.02 billion a year earlier, when BMO initially set aside $705 million in provisions for Bank of the West's loan portfolio.

Much of last year's increase was in provisions for non-performing loans, which are more of an automatic precautionary measure for loans. However, last quarter saw an increase mainly in provisions for non-performing loans, where the bank has determined that the loan quality has deteriorated and can no longer expect the loan to be fully repaid.

Provisions for non-performing loans totaled $658 million, an increase from $243 million in the prior year.

The impairments included $247 million from the Canadian consumer and commercial banking business, up $44 million from the last quarter, as rising credit card delinquencies and an increase in consumer bankruptcies weighed on losses, Chief Risk Officer Piyush Agrawal said on the conference call.

He said the bank expects provisions for vulnerable individuals to remain at current levels over the next few quarters as the Bank of Canada slows down rate cuts and this has a greater impact on consumers than some expected.

“Added to this is the exogenous factor of Canadian bankruptcies and filings, which were surprisingly higher and continue to be higher than generally expected,” Agrawal said.

In the US, provisions totalled $288 million, he said, including pressure from the trucking industry, which has been struggling for some time.

“Over the last 18 months, freight rates have remained at historic lows, volumes have not increased. If you look at the American tonnage index, it is at an all-time low. And resale values ​​have also been affected due to oversupply.”

Overall, the write-downs were 25 percent higher than analysts expected, said Scotiabank analyst Meny Grauman.

“The longer-term higher interest rate scenario is a reality and appears to be impacting credit performance more than Wall Street, or rather management teams, had expected,” he said in a statement.

“The question is how expectations (for loan loss provisions) will evolve from here, and the reasonable answer is higher.”

Overall, banks' revenues amounted to $7.97 billion, up from $7.79 billion in the same quarter last year.

BMO's Canadian retail and commercial banking business generated $872 million in the quarter, up from $819 million in the year-ago quarter. The bank's U.S. retail and commercial banking business generated $543 million, down from $731 million in the year-ago quarter.

The bank's wealth management business generated $320 million, up from $240 million a year earlier. BMO's capital markets business generated $459 million, up from $370 million a year earlier.

BMO's business services division reported a loss of $328 million in the second quarter, compared to a loss of $1.13 billion in the same quarter last year.

This report by The Canadian Press was first published May 29, 2024.

Companies in this story: (TSX:BMO)

Ian Bickis, The Canadian Press