Bank of Montreal Warns of Credit Pressures, Shares Drop After Profit Miss

Bank of Montreal has cautioned about increasing credit pressures after reporting disappointing profit results. This profit miss has led to a drop in the bank’s shares. The warning reflects potential challenges ahead for the bank, affecting investor confidence and market performance.

The Bank of Montreal (BMO.TO) has warned it will need to continue allocating funds for loans expected to remain unpaid, following a profit report that fell short of expectations for the sixth consecutive quarter. As a result, shares dropped by 6% in Toronto, leading to a second rating downgrade within a month due to a deteriorating credit outlook.

Jefferies analyst John Aiken, who downgraded BMO’s stock from “buy” to “hold,” acknowledged that the bank's efforts to address credit issues might be too late. He highlighted that the ongoing credit deterioration and BMO's significant exposure to commercial sectors are placing continued strain on the bank’s earnings.

The bank's third-quarter provisions for loan losses exceeded analyst predictions, partly due to impaired provisions for two clients, one in the U.S. and another within its Capital Markets business. BMO CEO Darryl White noted that recent impairments were influenced by prolonged high interest rates, economic uncertainty, and shifting consumer preferences.

White reported that fifteen accounts contributed to about half of the impaired provisions in its wholesale portfolio. Chief Risk Officer Piyush Agrawal described the increase in retail loan loss provisions as “systemic,” while noting that the wholesale sector’s issues were not confined to any particular industry. He assured that the bank had thoroughly reviewed its large client loans.

Approximately 43% of BMO’s U.S. revenue comes from the commercial sector, and around a quarter of its total profit is derived from the U.S. The bank anticipates a recovery starting in 2025 as central banks lower interest rates and unemployment stabilizes, which should relieve some pressure on consumers and businesses struggling with loan repayments.

In contrast, Bank of Nova Scotia (BNS.TO), Canada’s fourth-largest bank by market capitalization, exceeded profit estimates thanks to strong performance in its domestic and international operations. Its shares increased by 2.5%.

Canadian banks, seeking growth in the U.S. due to limited opportunities in the saturated domestic market, have made strategic acquisitions. BMO bought U.S. regional lender Bank of the West for $16.3 billion last year, while Scotiabank expanded into less banked regions in South America and Latin America, focusing on the Pacific Alliance trade bloc and investing $2.8 billion in U.S. regional bank KeyCorp.

Despite these expansions, Canadian banks, including BMO, face challenges in the competitive U.S. market, necessitating higher costs to retain deposits and drive loan growth. BMO’s credit loss provisions surged to C$906 million in the third quarter, up from C$492 million a year earlier, surpassing the expected C$734 million.

TD Securities analyst Mario Mendonca noted widespread weakness across all segments, while BMO earned C$2.64 per share, below the expected C$2.76. Scotiabank, on the other hand, saw a slight 0.7% decline in adjusted income to C$2.19 billion, with earnings of C$1.63 per share, marginally above estimates.

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Source: Reuters‍