Skip to main content

Severance costs from restructuring loomed large in Bank of Montreal’s financial results, pulling profit below estimates in an otherwise steady second quarter.

Canada’s fourth-largest bank by assets paid $120-million in pretax severance after shedding about 100 jobs from its capital markets division, seeking to streamline staffing levels to match market conditions. The changes came a year after BMO took a $260-million restructuring charge, which also affected year-over-year comparisons, as BMO continues to make driving toward greater efficiency a top priority.

Second-quarter profit increased by 5 per cent to $1.5-billion, fuelled by another strong performance from the bank’s U.S. arm, which has been its primary engine for growth in recent quarters. BMO also benefited from a modest spike in expected loan losses, which were up 10 per cent to $176-million, but still low by historic standards.

BMO faced high expectations going into earnings season for Canada’s Big Six banks. After posting impressive results in the first quarter of its fiscal year, against a backdrop of slowing economic growth in Canada, the bank’s shares have performed better than any other Big Six bank so far this year. “Our belief … had been that BMO would have to deliver a very strong [second fiscal quarter] to extend its lead,” said Steve Theriault, an analyst at Eight Capital Corp., in a research note.

After the bank’s earnings came out, its stock price fell 2.61 per cent to $100.35 in trading on the Toronto Stock Exchange.

“We feel good about our performance in [the second quarter] having earned through a severance cost with strong operating performance across our businesses,” said Darryl White, the bank’s chief executive, on a conference call with analysts. “We’re confident in the opportunities to continue delivering good results for the second half, which we expect to be similar to the first."

One of BMO’s key targets, watched closely by analysts, is to get its efficiency ratio – which measures expenses as a percentage of revenue – to 58 per cent by 2021. The restructuring in capital markets, which cost the bank $90-million after tax, will reap $40-million in savings in the latter half of this fiscal year, and $80-million annually after that. Second-quarter expenses rose to nearly $3.6-billion, up 10 per cent including the new severance costs but excluding last year’s restructuring charge, and the bank’s efficiency ratio was still above 63 per cent.

Revenue improved 11 per cent to $6.2-billion in the quarter that ended Apr. 30.

BMO reported second-quarter profit of $1.5-billion, or $2.26 a share, up 20 per cent from $1.25-billion, or $1.86, a year ago. But last year’s second-quarter earnings were also diminished by the $260-million restructuring charge, which cost the bank $192-million after tax.

Adjusting to exclude that charge as well as costs related to acquisitions, BMO earned $2.30 a share. Analysts had expected adjusted earnings per share of $2.33, according to data from Refinitiv.

BMO increased its quarterly dividend by 3 cents to $1.03 a share.

Commercial lending was a source of strength, with loans in both the Canadian and U.S. retail businesses rising 15 per cent, year-over-year. That contributed to a 5-per-cent increase in profit in the Canadian arm, to $615-million, despite personal loans and mortgage balances only growing by 1 per cent each.

“Given overall consumer indebtedness, the consumer has slowed in borrowing more, and we think that’s healthy,"chief financial officer Tom Flynn said in an interview. "And secondly, GDP growth is around 2 per cent in nominal terms, and so the growth in credit is tracking at similar numbers.”

Profit from U.S. retail banking increased 17 per cent year-over-year, to $406-million, driven by the strong commercial loan growth as well as a decline in expected credit losses. The division recovered a loan to a commercial client that had previously been written off.

Thanks to that recovery, the bank reduced provisions for credit losses on impaired loans by $22-million. Provisions are the funds banks set aside to cover soured loans. But BMO also added $26-million in provisions on performing loans – a more forward-looking measure of credit risk – as it added new loans to its portfolios and adjusted its economic forecasts.

Capital markets profits fell 13 per cent to $249-million, dragged down by the severance costs. But its performance was otherwise strong, with revenue from investment and corporate banking rising 21 per cent, thanks in part to higher underwriting revenue, while trading products revenue improved by 16 per cent. “There’s no change to our capital markets strategy, and we aren’t exiting any businesses," Mr. Flynn said.

National Bank of Canada will wrap up earnings season for the country’s big banks when it reports second-quarter earnings on May 30.

Report an editorial error

Report a technical issue

Editorial code of conduct

Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 9:38am EDT.

SymbolName% changeLast
BMO-T
Bank of Montreal
+0.18%131
BMO-N
Bank of Montreal
-0.02%96.36

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe