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Bank of Montreal BMO reported better results than we expected, as the company benefited from a C$870 million reversal in a legal provision from 2022. However, excluding this one-time gain, the bank’s results were considerably less attractive, as elevated credit provisioning remains a headwind. Net revenue increased 7.7% from last year to C$8.96 billion, only a 0.4% increase on an adjusted basis. Adjusted diluted earnings per share decreased to $1.90 from $2.64 last year and $2.64 last quarter. These results translate to a return on equity of 9.8%, below the bank’s peers and its own medium-term target of 15%. As we incorporate these results, we do not plan to materially change our fair value estimate of C$133 per share.
Key Morningstar Metrics for Bank of Montreal
While rising credit costs have been a trend for some time, the bank’s provisioning expense was worse than we expected. Provisioning for credit losses increased to C$1.5 billion from C$446 million last year. The increase came from higher allowances on both impaired and performing loans as the bank continues to build credit reserves, with its PCL ratio now up to 0.91%.
On a more positive note, gross impaired loans decreased to 0.86% of total loans from 0.89% last quarter. Additionally, new impaired loan formations have not risen nearly as much as provisioning. While we expect credit costs to remain elevated into 2025, we think we are at or near the peak.
The firm’s low revenue growth was again primarily due to its US banking segment, which saw revenue shrink by 1% from last year. This was mostly due to lower net interest income, which fell by 1%. Average loan balances fell 2% from last year, while the segment’s net interest income margin decreased to 3.78% from 3.86% last year, though this was an improvement from the 3.73% reported last year. As a result, the segment’s return on equity fell again to only 2.9% as the firm continues struggling to produce decent results in the US.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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