TORONTO — Trouble in BMO Financial Group's loan book has once again weighed on its quarterly results, prompting analyst worries about the bank becoming an outlier in this credit cycle.
The bank on Tuesday reported provision for credit losses amounted to $906 million for its third quarter, up from $492 million a year earlier, as it reported adjusted earnings that were down from last year.
Chief executive Darryl White said the scale of the loan loss provisions did not meet the bank's expectations and that it expects those provisions to stay elevated in the near term.
"The combination of prolonged high interest rates, economic uncertainty and changing consumer preferences had an acute impact," said White.
The bank emphasized that while some segments like trucking and commercial loans have been under pressure, overall, the uptick in potential losses aren't concentrated geographically or by sector.
Instead it's more of a broad unwinding of the unusual credit environment caused by the pandemic, where borrowers who got low interest rates and free money through government stimulus are getting hit by the higher rates and consumer pullback.
"It covers up a lot of problems which then can come back later," said White.
While the Bank of Canada has already started reducing its benchmark interest rate and the U.S. Federal Reserve is expected to soon begin as well, it will take time for the strain to ease and some companies will struggle, he said.
"For some of those instances, it's just too late. And what we're seeing is therefore, you know, a faster rise with higher losses than we've seen."
Chief risk officer Piyush Agrawal said the shift in provisions is difficult to predict quarter to quarter as there's heightened unpredictability.
"These are hard to call," he said. "You're going through a cycle where you've got a company for sale with 10 bidders and all of a sudden, there's nobody at the end, they all go away."
The third quarter rise in provisions put the bank's ratio of impaired loans to net loans at 0.5 per cent, up from 0.21 a year ago and up from 0.41 per cent in the second quarter.
The rise in third quarter provisions came after the bank reported an unexpected increase last quarter as well that saw its share price drop almost nine per cent on the day.
On Tuesday, the bank's shares closed down 6.45 per cent at $112.04 on the Toronto Stock Exchange.
The second earnings miss because of credit issues prompted Jeffries analyst John Aiken to downgrade the bank on a worsened credit outlook.
"While we do expect that underlying growth will accelerate in BMO's U.S. platforms, we no longer believe that it will be sufficient to offset the credit headwinds."
The bank reported adjusted profits of $2.64 per diluted share in its latest quarter, down from an adjusted profit of $2.94 per diluted share in the same quarter last year.
Analysts on average had expected BMO to earn an adjusted profit of $2.76 per share for the quarter, according to to LSEG Data & Analytics.
Revenue for the quarter totalled $8.19 billion, up from $8.05 billion in the same quarter a year ago. Unadjusted profits were $1.87 billion, up from $1.57 billion last year.
While results outside the credit provisions looked better than expected, it wasn't enough to outweigh concerns about the bank's loan book, said Scotiabank analyst Meny Grauman in a note.
"After a big credit-focused miss in Q2, the market was laser focused on credit heading into Q3 reporting, and it is unfortunate that this is where the issues are once again," he said.
"The bottom line is that fears that BMO is in fact the outlier of this credit cycle will continue to weigh on the shares."
This report by The Canadian Press was first published Aug. 27, 2024.
Companies in this story: (TSX:BMO)
Ian Bickis, The Canadian Press
