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Cautious consumers pressure BMO's bottom line

Bank of Montreal raised $1.3-billion Wednesday in debt that was quickly scooped up by investors.

Canadian consumers put away their credit cards and were paying down debts in the second quarter, a trend that is starting to pressure profits in the banking sector.

Bank of Montreal reported second-quarter earnings Wednesday that revealed slowing consumer loan growth, a sign of what may be to come as Canadian banks report earnings this week. BMO's results showed fewer credit card purchases by consumers and less appetite to carry debt.

At the same time, the amount of interest BMO paid out on deposits rose, suggesting banks are starting to ramp up competition in that area. Weaker credit income and rising deposit payouts could cause headwinds for the banks, analysts say.

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"There is definitely a change in customer preferences going on, on the consumer side of the business," Frank Techar, head of Canadian retail banking at BMO told analysts on a conference call. "We have seen a slowdown in our credit card activity - not only the transaction volumes but also in the revolving balances that our customers are holding."

BMO reported a profit of $800-million or $1.34 a share in the second fiscal quarter, up 7 per cent over the same quarter last year. While that performance beat analyst expectations of $1.31 a share, the higher earnings were driven mostly by lower loan-loss provisions, the amount of money banks set aside to cover unpaid loans. Loan loss provisions fell to $145-million from $249-million a year ago, as the economy improved.

The lower provisions helped mask sluggish earnings in some of BMO's banking divisions, including Canadian personal and commercial banking where earnings were relatively flat, rising 1.8 per cent to $401-million from a year earlier.

With income from credit and loans slowing, analysts are concerned about shrinking deposit margins. In Canada, deposit interest paid out to retail clients rose 21 per cent to $639-million at BMO, compared to the same quarter a year earlier.

National Bank Financial analyst Peter Routledge said he was expecting to see a slowdown in consumer lending this quarter, as Canadian households attempt to reduce their debt levels. "What I wasn't expecting was margin pressure as severe as we saw at BMO this quarter," he said.

BMO holds about 12 per cent of the deposit market. As Canada's other big banks prepare to issue second-quarter earnings, including Toronto-Dominion Bank, National Bank of Canada and Canadian Imperial Bank of Canada on Thursday, analysts will be watching to see whether the trend exists at other lenders.

"It would be very surprising to me if we didn't see [similar]pressure at the other banks. It's just how severe, it will be very interesting to see," Mr. Routledge said.

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As consumer borrowing slows in Canada, economists expect business lending will increase as companies that have paid down debt in the recession now look to expand. Indeed, Bank of Canada statistics show business lending is growing faster than consumer lending, on a quarterly basis, for the first time since 2008.

BMO chief executive officer Bill Downe said in an interview that he expects the bank to be well positioned to take advantage of business loan growth. Personal and consumer loans represent 64 per cent of the bank's Canadian loan portfolio, but Mr. Downe is optimistic BMO will expand its business loan book in the next few years. Business lending grew 7 per cent at the bank during the second quarter, compared with low-single-digit growth for consumer lending.

"In Canada, commercial loan growth has actually been fairly robust," Mr. Downe said. "The cash reserves and capital reserves of the commercial marketplace are very significant."

Profit in several other of BMO's operations fell or were flat. Capital markets income, which includes trading underwriting and securities commissions, fell 9.4 per cent in the second quarter, to $235-million. The drop was owing to a more challenging trading environment, BMO said. However, the bank said business from mergers and acquisitions and underwriting is rebounding this year.

The bank's private client group, which includes wealth management and insurance operations, made $101-million, down 13 per cent from the same quarter a year ago. The drop was attributed mainly to charges in the bank's reinsurance business.

Insurance income fell to $1-million, a drop of $43-million from a year ago. That included a $47-million after tax charge due to unusually high claims related to the earthquakes in Japan and New Zealand, the bank said. BMO is primarily in the reinsurance business, providing coverage for other insurers in those regions.

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Profit at the bank's U.S. retail banking division fell 2.8 per cent, to $43-million. The drop was attributed to higher loan losses in the Midwestern U.S. banking operations.

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