Bank of Montreal Q3 beats estimates with solid retail banking, loan recoveries

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The Bank of Montreal Financial Group building in downtown Toronto is shown on Tuesday, January 28, 2014. Bank of Montreal reported a third-quarter net income of $1.126 billion, or $1.67 per share, relatively unchanged from the same time last year. THE CANADIAN PRESS/Nathan Denette

TORONTO - A strong performance at Bank of Montreal's Canadian operations, combined with improved recoveries from loans previously written off, helped the bank outperform analyst estimates in the third quarter.

The bank (TSX:BMO) earned a third-quarter profit of $1.126 billion, hardly changed from $1.123 billion a year ago, under standard accounting.

But BMO's more closely watched adjusted profit was up four per cent, rising to $1.162 billion from $1.122 billion in the third quarter of fiscal 2013.

The adjusted earnings amounted to $1.73 per share — seven cents higher than a general estimate compiled by Thomson Reuters and up from $1.66 in the year-earlier period. Net income before adjustments was $1.67, up from $1.66 a year before.

Barclays analyst John Aiken said BMO's personal and commercial retail banking operations in both Canada and the United States had "reasonably strong" performances in the three months ended July 31.

Aiken noted that BMO's provisions for credit losses were also lower than expected as it recovered $182 million from previously written off loans, accounting for more than five cents per share in earnings.

But he also said BMO's domestic banking operations were strong, U.S. banking operations were improved and earnings from capital markets were robust.

The weakest segment of BMO's third-quarter was in wealth management, which recorded expenses related to a recent U.K. acquisition as well as a $22-million after-tax charge due to unfavourable movements in long-term interest rates. A year earlier, BMO had a $42-million after-tax benefit related to fluctuations in long-term interest rates.

"It appears that BMO may be gaining relative momentum in its retail operations with some of the upside available in its wealth management operations obscured by a temporarily weaker quarter in insurance," Aiken wrote.

"Although the upside in capital markets is up for debate, it is quite conceivable that BMO's earnings in the third quarter may have set it up for some sustained outperformance coming out of reporting season."

BMO's overall provision for credit losses, including the recoveries, was $130 million — up from an unusually low $76 million a year earlier and down from the $162 million recorded in the second quarter of 2014.

The bank's overall revenue was $4.2 billion, up five per cent from $4 billion a year earlier before adjustments and up 10 per cent from an adjusted $3.842 billion in the third quarter of 2013.

Return on equity was 14.4 per cent, compared with 15.5 per cent year-over-year.

BMO said its Canadian personal and commercial banking operations earned $526 million in the latest quarter, up eight per cent from a year ago, helped by higher revenue.

The bank said year-over-year loan growth was seven per cent, while deposits grew nine per cent.

Canadian P&C revenue was $1.66 billion, up from $1.564 billion year earlier and $1.560 billion in the previous quarter — with increase in both net interest and non interest totals.

Cameron Fowler, who heads the Canadian retail banking operation, told analysts there was "broad-based" growth in retail investment products, card products and commercial business.

Adding to its base of premium card customers has been a priority and the results have been good.

"Those originations have been very, very strong — a multiples of past years," Fowler said.

In the U.S., BMO said personal and commercial banking earned US$147 million, up two per cent from a year ago.

BMO's wealth management business earned $190 million, down $27 million or more than 10 per cent from a year ago, while BMO capital markets earned $306 million, up 14 per cent from a year ago.

The wealth management business was hampered by costs associated with the acquisition of F&C Asset Management PLC, a $1.3-billion deal announced in January.

Gilles Ouellette, head of BMO's wealth management group, said the plan for F&C is to introduce the U.K.-based company's products to North American and North American wealth management products to F&C's base.

"We're pretty happy with what is happening. After a quarter, it's pretty early but certainly it seems to be hitting on every cylinder," Ouellette said.

Bank of Montreal shares closed Tuesday at $82.16, up 35 cents, on the Toronto Stock Exchange.

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Note to readers: This is a corrected story. An earlier version said BMO's profit a year ago was $1.62 billion, which was its adjusted profit in this year's third quarter.