Banking slowdown pinches as Bank of Montreal pares costs

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A weaker Canadian economy is starting to hit home on Bay Street, as Bank of Montreal extends an aggressive cost-cutting campaign to compensate for slower growth.

Canada's oldest bank revealed an $82-million restructuring charge in its second-quarter earnings Wednesday, resulting from severance payments and reorganization costs. That is the fourth such charge in BMO's last six quarters, and the charges now total $255-million in that time.

BMO isn't the only bank watching its costs. Executives at other major banks, including Toronto-Dominion Bank and Bank of Nova Scotia, have cited expense control as a major priority in recent weeks because earnings growth from their Canadian operations is tailing off. Canadian consumers are heavily indebted and the country's housing market is cooling, limiting mortgage growth.

BMO's results, however, were the most disappointing of the four major banks to report so far. The bank made $975-million in the second quarter, down 6 per cent from the same period in 2012 and equal to $1.42 a share. The profit came in below analysts' average estimate of $1.47. After one-time adjustments, the earnings were up 1 per cent to $1.46 per share. The stock fell 1.9 per cent.

Bill Downe, BMO's chief executive officer, said in an interview that his bank's historical focus on the commercial market will help BMO navigate through any slowdown in domestic retail banking. "I think the market is all of a sudden going to come to the realization that we're underweighted [in] retail banking in Canada," he said.

However, on a conference call with analysts, he said the bank is also "taking concrete steps to be more efficient" and that "the restructuring charge this quarter is part of an active ongoing commitment to align non-interest expense with the current and future business environment."

Peter Routledge, an analyst at National Bank Financial Inc., believes that's because BMO is hurting more than others at the moment. "Each of the Big Six banks' Canadian [personal and commercial] banking segments have suffered from similar headwinds – narrowing margins and slowing loan growth. But BMO is suffering the most, in our view."

"Moreover, this suffering has occurred in a reasonably benign credit environment," he added. "If, and when, credit losses start to rise, then BMO is also likely to suffer disproportionately. For that reason, we think the bank will ultimately have to embark on a more substantial cost-reduction effort within its domestic [personal and commercial] bank."

Other banks are relying heavily on their international operations to offset any slowdown in Canada. TD has a substantial U.S. retail operation that is getting stronger as the U.S. economy rebounds, and Scotiabank is watching its international operation – particularly in Latin America – take off

For now, commercial loan growth remains a bright spot for BMO, growing 12 per cent in Canada and 17 per cent in the U.S. over the same period in 2012.

Yet there are questions about BMO's net interest margins – the spread between the rate that the bank pays to borrow money and the rate at which it lends the money out. The margin dropped more than other banks this quarter as BMO tried to lure new clients with high-interest savings accounts, which increase the cost the bank pays to borrow money in the form of deposits.

While a Canadian slowdown could hurt the banks over the coming year, Mr. Downe countered the fears by noting that any cooling would be good on a macro level. "A reduction in the growth rate of consumer debt in Canada is good for the long-run health of the economy," he said.