Bank of Montreal BMO-T -0.20%decrease reported lower third-quarter profit but beat analysts’ estimates on stronger-than-expected performance across its businesses as the lender seeks to boost its profitability.
The lender has been streamlining its operations and rejigging its balance sheet as part of its strategy to boost its profitability, particularly in its U.S. unit.
BMO’s net income fell 25 per cent from the same quarter last year to $1.75-billion, or $2.38 per share, in the three months that ended July 31. The bank’s reported net income was weighed down by certain items, including a charge related to the announced sale of BMO’s transportation and vendor finance business.
Adjusted to exclude those items, the lender said net income rose 19 per cent to $2.86-billion in the quarter. On an adjusted basis, BMO said it earned $3.96per share. That edged out the $3.75 per share analysts expected, according to data by Bloomberg.
“In U.S. banking, we’ve now made the transition from optimization to an inflection point where we can drive an acceleration in profitable growth,” BMO chief executive officer Darryl White said during a conference call with analysts.
BMO also announced a plan to buy back 25-million of its common share. The bank maintained its quarterly dividend at $1.71 per share.
In March, BMO revealed its new strategy to revamp its U.S. business and improve its return on equity – a closely watched measure of profitability. In 2024, BMO set a goal of improving its ROE to 15 per cent by the end of 2027.
In the third quarter, BMO posted adjusted ROE of 14 per cent, up from 12 per cent in the same quarter last year.
The U.S. division – which makes up 40 per cent of BMO’s earnings – has weighed on the bank’s profitability in recent years. The lender has rejigged the structure of its U.S. unit by combining its key businesses and bank sold its transportation and vendor finance businesses.
In June, BMO said it is acquiring the capital markets unit of Australia-based EurozHartleys Group Ltd. as the lender expands its metals and mining investment banking unit. In mid-August, BMO and Royal Bank of Canada said they agreed to jointly sell Moneris to California-based Francisco Partners for about $2-billion in cash.
BMO also plans to grow its retail operations in California, adding about 150 branches over five years.
Heading into the third quarter, analysts expected the bank’s sizable U.S. business to prop up earnings as commercial loan demand in the market edged higher.
BMO had set a target to improve the unit’s ROE from eight per cent to 12 per cent by 2028. In the third quarter, ROE in its U.S. business rose to 9.8 per cent.
“We view the strength from its U.S. retail bank as a distinct positive and meant that BMO did not lean on solely wealth and capital markets to beat consensus,” Jefferies analyst John Aiken said in a note to clients. “We anticipate that these results will be warmly received by investors.”
BMO is the first major Canadian bank to report earnings for the fiscal third quarter. Bank of Nova Scotia is also releasing results Tuesday. National Bank will post earnings on Wednesday. Royal Bank of Canada, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce will wrap up the week with earnings releases on Thursday.
Canadian bank stocks have surged this year, outpacing Canada’s stock market and their U.S. peers. Investors have been eagerly awaiting earnings to help determine whether bank stocks have more room to run, or if their rich valuations have peaked.
In the quarter, BMO set aside $722-million in provisions for credit losses – the funds banks set aside to cover loans that may default. That was lower than analysts anticipated and lower than the $797-million in provisions the bank reserved in the same quarter last year.
Total revenue rose 10 per cent in the quarter to $9.9-billion while expenses climbed 31 per cent to $6.68-billion, driven by higher performance-based compensation and a stronger U.S. dollar, as well as investments in talent, technology and marketing.
Profit from Canadian personal and commercial banking was $980-million, up 16 per cent from a year earlier, driven by higher net interest income.
Profit from the bank’s U.S. arm was up 13 per cent at $868-million as the stronger U.S. dollar boosted revenue, expenses and net income by two per cent.
The wealth management division generated $408-million of profit, up four per cent. And capital markets profit surged 46 per cent to $645-million on higher revenue across global markets and investment and corporate banking.
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