Bank of Montreal faces pressure as commercial loan losses rise, leading to a sharp drop in shares
Bank of Montreal's shares dropped sharply due to concerns about its exposure to commercial loan losses, with executives warning of further difficulties ahead, according to BNN Bloomberg.
The bank allocated more funds than expected for potentially bad loans during the fiscal third quarter, affecting its US operations. Analysts had already lowered their estimates, anticipating weaker credit performance in BMO’s commercial loan portfolio.
BMO reported a profit of $2.64 per share on an adjusted basis for the three months ending in July, missing the average estimate of $2.75 from analysts surveyed by Bloomberg. The bank's provisions for credit losses totaled $906m, exceeding the forecasted $745m.
Consequently, BMO's shares fell by 6.9 percent to $111.52 by midday, marking the largest intraday decline since a similar earnings miss occurred in late May, which was also due to higher loan-loss provisions.
Following this, Jefferies Financial Group Inc. analyst John Aiken downgraded BMO's stock from a buy to a hold.
Aiken commented, “We freely admit that we may be closing the barn door after the animals have escaped,” referring to the bank’s overexposure to commercial loans.
He added that the ongoing pressure on BMO’s earnings is likely to persist, given the bank's significant exposure to commercial loans on both sides of the border and the lagging impact of credit. Aiken also noted that the current easing cycle by central banks is unlikely to provide immediate relief.
In contrast to BMO, Bank of Nova Scotia exceeded analysts' expectations, with its shares rising by 1.8 percent to $66.78. Scotiabank reported a profit of $1.63 per share on an adjusted basis for the fiscal third quarter, slightly above the average estimate of $1.62.
The bank’s domestic banking unit recorded adjusted earnings of $1.1bn, a 6 percent increase from the same period last year, after two years of minimal growth in its Canadian division due to slow loan growth and provisions for loan losses.
Aiken observed that Scotiabank’s “in-line” quarter might be viewed positively, given the third-quarter earnings results so far from the major Canadian banks.
BMO has faced more severe credit issues than many of its peers in Canada and the US as both consumers and businesses struggle to manage their financial obligations amid prolonged high interest rates.
While BMO’s retail lending has performed comparably to other lenders, its commercial and capital-markets loans have required higher provisions, significantly impacting the bank’s results.
Chief Risk Officer Piyush Agrawal explained that the bank has seen particular stress in the commercial real estate, manufacturing, and transportation sectors.
He noted that about 70 percent of the large provisions for losses were part of syndicated loan facilities, where other banks also incurred losses, indicating that these issues are not unique to BMO.
Agrawal expects BMO to continue reporting elevated provisions for loan losses over the next one or two quarters before returning to its long-term average.
Bank of Nova Scotia analyst Meny Grauman acknowledged that BMO’s results showed better-than-expected performance in some areas, such as positive operating leverage due to lower expenses.
However, he pointed out that this “silver lining” is unlikely to boost the bank’s shares in the short term. Grauman concluded that concerns about BMO being an outlier in the current credit cycle would continue to weigh on its stock.
Bank of Montreal, Canada’s third-largest bank by market capitalization, expanded its US presence last year by acquiring San Francisco-based Bank of the West. This acquisition has increased its exposure to potential credit losses in the US market.
The bank’s US personal and commercial banking unit reported adjusted earnings of $539m, a 7 percent decline from the previous year, as lower expenses were not sufficient to offset higher credit loss provisions and a drop in non-interest revenue.
