Bank of Montreal (BMO) CEO Darryl White asserted that the bank’s credit challenges, a persistent issue throughout the year culminating in another earnings miss in the fiscal fourth quarter, are now “contained.” This statement followed the bank’s announcement of setting aside over C$1.5 billion (US$1.1 billion) for potential bad loans, exceeding analyst forecasts by approximately 50%.
Table Content:
BMO’s Q4 Performance and Credit Provisions
BMO reported adjusted earnings of C$1.90 per share for the fourth quarter, falling short of the C$2.38 consensus estimate. The significant increase in provisions for credit losses, a key factor in the earnings miss, was attributed to the challenging economic environment and specific loan portfolio performance. Chief Risk Officer Piyush Agrawal, however, projected a more optimistic outlook, stating that while provisions will likely remain elevated, the fourth quarter represents a peak, anticipating moderation throughout 2025. CEO White reinforced this view, emphasizing the containment of the credit issues.
Analyst Reactions and Market Response
Several analysts suggested that the substantial provisions taken in Q4 could represent a “clearing event,” proactively addressing existing credit weaknesses. John Aiken, an analyst at Jefferies Financial Group Inc., noted that BMO appears to be taking decisive steps to resolve its credit challenges by bolstering reserves against potential future deterioration. Despite an initial dip at market opening, BMO’s shares rebounded, trading up 3% to C$138.22 in Toronto. The stock has shown a 4.3% gain year-to-date.
Past Performance and US Expansion
While BMO has consistently delivered strong operating results this year, recurring disappointments related to credit provisions have raised concerns among analysts. Questions remain regarding the underperformance of BMO’s US commercial loan book compared to its peers. The bank’s acquisition of Bank of the West last year, expanding its US presence, also heightened its exposure to potential credit risks. Following a sharp decline in share price after the third-quarter results in August, BMO has experienced a recent recovery.
Capital Boost and Dividend Increase
A significant legal victory related to a Ponzi scheme orchestrated by Tom Petters provided BMO with an unexpected capital boost of C$875 million after taxes in the fourth quarter. This reversal of a previous provision contributed to a 60 basis point increase in the bank’s Common Equity Tier 1 capital ratio, reaching 13.6%. Furthermore, BMO announced a 3% increase in its quarterly dividend to C$1.59 per share and authorized a share buyback program of up to 20 million shares.
Comparison with Other Canadian Banks
In contrast to BMO’s elevated provisions, other major Canadian banks, including Royal Bank of Canada, Bank of Nova Scotia, and Canadian Imperial Bank of Commerce, reported loan-loss provisions below analyst expectations. National Bank of Canada, however, recorded slightly higher provisions than anticipated. Paul Gulberg, a Bloomberg Intelligence analyst, highlighted that the majority of BMO’s fourth-quarter loan-loss provisions originated from its capital markets and commercial banking segments.
Conclusion
BMO’s fourth-quarter results, marked by an earnings miss driven by substantial credit provisions, prompted CEO Darryl White to declare the bank’s credit issues “contained.” While challenges persist, positive indicators such as the anticipated moderation of provisions in 2025, a significant capital boost from a legal victory, and a dividend increase signal a potential turning point for the bank. The market’s positive response to the announcement further suggests a degree of confidence in BMO’s ability to navigate these challenges and deliver future growth. The bank’s strategic decisions in the coming quarters will be crucial in validating this optimism.
