BMO Financial Group reported a third-quarter profit of $1.87-billion as its provision for credit losses rose compared with a year ago.Andrew Vaughan/The Canadian Press
When banks set aside money for possible bad loans, it’s like preparing for a rainy day. Bank of Montreal BMO-T seems to have a storm coming.
The lender stood out in the fiscal third-quarter earnings for Canadian banks by having an unexpectedly high level of loan-loss provisions – and an explanation for them that left investors dissatisfied. By contrast, Royal Bank of Canada RY-T and Canadian Imperial Bank of Commerce CM-T dazzled Bay Street in part by highlighting the credit quality of their loan books, and how relatively little they had to set aside for future problems.
BMO said it made bad-loan provisions of $906-million, up from $492-million a year earlier. While five of Canada’s six big banks provisioned more in 2024′s third quarter than the year before, BMO’s increase of 72 per cent was easily the largest, according to a Globe and Mail analysis of the banks’ reports.
Analysts had expected $735-million in BMO provisions, according to LSEG data. Had BMO hit consensus on provisions, the bank would have handily beat analysts’ expectations – and possibly found itself closer to the RBC and CIBC camp, instead of standing alone.
The banks’ share prices since their earnings days illustrate the disappointment in BMO. Its stock closed down 6.5 per cent Tuesday and had only slightly recovered by week’s end.
By contrast, RBC and CIBC built on their gains from Wednesday and Thursday, respectively. By Friday’s market close, RBC was up 4.1 per cent in the three trading days since its earnings, and CIBC shares were up 7.2 per cent in two.
The bank-analyst community sharply queried BMO chief executive officer Darryl White on a conference call on Tuesday. He said “BMO has a long history of superior credit management, and that has not changed.”
“The combination of prolonged high interest rates, economic uncertainty and changing consumer preferences had an acute impact” on its loan book, he said. Most provisions were related to loans made during the COVID-19 pandemic, he added. The bank said there was no particular industry or geographic market behind the increased loan losses.
Only 15 customers make up almost 50 per cent of BMO’s year-to-date provisions for impaired commercial loans, Mr. White said. (Banks make provisions both for loans where the borrower is making timely payments – called “performing” – and loans where the borrower has fallen behind, called “impaired.” The amount set aside reduces the bank’s earnings.)
Piyush Agrawal, the company’s chief risk officer, then said, “we expect impaired provisions to remain elevated over the next couple of quarters.”
Analyst Mario Mendonca of TD Securities Inc. responded by saying “clearly, something’s gone wrong. And I appreciate your comments around the pandemic, but the pandemic was not unique to BMO.” Mr. Mendonca said the rise in provisions represented “underwriting failures.”
Mr. Mendonca came out of the call and downgraded his rating on BMO to a “hold” from a “buy.”
“Note that in 2008, BMO’s [provisions] moved three quarters sooner and more abruptly than its peers and remained higher for several years,” he wrote. “We now expect BMO’s loan losses to remain higher than the group for the next 12-18 months.”
RBC Dominion Securities Inc. analyst Darko Mihelic downgraded BMO stock July 30, saying his deep dive on the bank’s financials suggested its credit quality was declining faster than peers in the United States. (Nearly one-third of BMO’s third-quarter profits came from the U.S.)
Mr. Mihelic titled his postearnings BMO report this week “Waiting for vindication or an admission.”
RBC and CIBC had no such problems with the analyst community.
RBC’s third-quarter profits blow past analysts’ estimates
CIBC reports sharp spike in profit on revenue growth, lower loan-loss provisions
RBC’s provisions were up slightly from 2023′s third quarter, but at $659-million, they were $241-million, or more than 25 per cent, below analysts’ consensus. That, coupled with other strong results including from recent acquisition HSBC Canada, drove the stock to an all-time high Wednesday. And Thursday and Friday as well.
Bank of America Merrill Lynch analyst Ebrahim Poonawala said RBC combines “a best-in-class franchise and strong execution.”
CIBC was the only bank of the big six where analysts were forecasting fewer provisions than the year before, owing to big set-asides in 2023 for commercial real estate problems in the United States. But CIBC’s provisions came in more than 15 per cent below the consensus and were 34 per cent lower than the prior year.
Mr. Poonawala upgraded CIBC to a “buy” on the results. “About time that investors take notice of improved execution,” he wrote.