Bank of Montreal's first-quarter earnings have painted a clear picture of the difficult balancing act Canada's banks are now trying to negotiate, as they turn to secondary divisions such as capital markets and wealth management to compensate for slowing revenues from their core domestic banking businesses.
A key factor in those slowing revenues is the record-high debt load of Canadian consumers, which is not only a concern for the wider economy but is forcing the financial sector to lean more heavily on other divisions to boost earnings.
BMO, the first of Canada's major banks to report first-quarter earnings, reported stronger-than-expected profits Tuesday from its investment banking division, which helped mask an otherwise sluggish picture from personal and commercial banking in Canada.
Canada's fourth-largest bank made $1.05-billion or $1.53 a share in the quarter, down 5 per cent from $1.11-billion or $1.65 a year ago. Revenue fell 1 per cent to $4.08-billion. BMO also announced a surprise dividend increase, boosting its quarterly payout by 2 cents to 72 cents.
On an adjusted basis, factoring out unusual items, BMO made $1.52 a share. That beat the expectations of analysts, who were forecasting earnings of about $1.47 a share. The adjusted earnings exclude costs related to the bank's U.S. expansion, and the diminishing impact of its structured credit business in the U.K., which is being wound down. That business contributed just $7-million in profit this quarter, compared with $136-million a year ago.
The investment banking division made $310-million in the quarter, up 38 per cent, as investment banking benefited from an increase in mergers and acquisition activity, more debt underwriting, and higher trading activity. It was the second succsessive quarter where profit topped $300-million in capital markets.
"Much stronger-than-expected trading and underwriting revenues provided an upside surprise," Rob Sedran, an analyst with CIBC World Markets, wrote in a research note to clients.
However, slimming margins in the core personal and commercial banking businesses in Canada were a concern, as were the sluggish revenues in those divisions. BMO's Canadian retail banking operations made $458-million in the quarter, an increase of 4 per cent, as the bank reported fewer losses on bad loans. Net interest income, a measure of the profits banks make on their lending, fell more than 4 per cent.
Analysts have long been forecasting that retail banking growth would slow amid high consumer debt loads in Canada, which is lowering appetite for borrowing. "Domestic bank revenues were flat both sequentially and compared to prior years," Brad Smith, an analyst with Stonecap Securities, said in a note to clients.
The U.S. retail banking division made $183-million, up 17 per cent from a year ago. The bank's private client group, which caters to wealthy customers, made $163-million, up 56 per cent from a year ago. However, BMO reported a loss of $65-million in its corporate services division, a significant drop from the $181-million profit that segment made a year ago when the bank had higher revenues from a structured credit business that is now winding down.
Despite the sluggish revenue picture, BMO chief executive officer Bill Downe said he was pleased with the quarter. "BMO had a strong first quarter, with momentum in each of our businesses and a strong capital position," Mr. Downe said in a statement. "Looking ahead, we are well-positioned to leverage our North American platform and deliver sustained earnings growth."
The dividend increase was seen as a positive for the bank, since BMO wasn't considered a likely candidate for a boost this quarter, which could put pressure on other banks to raise their payouts. "BMO's dividend increase was a bit of a surprise," Barclays Capital analyst John Aiken said in a research note to clients. "Given the importance of dividend yields to the banks' valuations, it will likely put some pressure on others who do not announce similar increases this quarter."