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Bank of Montreal Sets Aside $813 Million for Soured Loans

By Doug Alexander

(Bloomberg) Bank of Montreal followed other Canadian lenders in building up reserves for loan losses to brace for the aftershocks from plunging oil prices and a pandemic that’s caused a near economic standstill.

  • Bank of Montreal, which has consumer-banking operations in Canada and the U.S., set aside a record C$1.12 billion ($813 million) in loan-loss provisions in the fiscal second quarter. The Toronto-based lender joins Bank of Nova Scotia and National Bank of Canada in posting a surge in provisions, which eroded earnings in results for Bank of Montreal that missed analysts’ estimates.

Key Insights

  • Banks in Canada are trying to get ahead of soured loans they expect to result from the double-whammy of low oil prices sideswiping the energy industry and pandemic-spurred lockdowns that shuttered businesses, leading to record unemployment. Bank of Montreal’s provisions as a percentage of average net loans was 0.94% in the quarter, triple the portion in the first quarter and up from 0.16% a year earlier.
  • Canadian banking is the lender’s largest division and typically accounts for most of its loan-loss provisions. The domestic retail bank posted C$361 million of profit in the quarter, down 41% from a year earlier on a surge in provisions.
  • Chief Executive Officer Darryl White has pushed for more growth from the U.S. banking division, which includes Chicago-based BMO Harris Bank. Earnings from the U.S. personal and commercial division fell 17% to C$339 million from a year earlier.
  • Market volatility in the early days of Covid-19 had been a boon for banks’ capital-markets divisions thanks to heavy trading, countering some of the pandemic’s pain. That volatility failed to help Bank of Montreal. The company’s BMO Capital Markets unit posted a C$74 million loss in the quarter, compared with a C$250 million profit a year earlier, as trading revenue and investment banking fees fell.

Market Reaction

  • Bank of Montreal shares have fallen 30% this year through Tuesday, compared with a 20% decline for Canada’s eight-company S&P/TSX Commercial Banks Index.

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  • Second-quarter net income fell 54% to C$689 million, or C$1 a share, from C$1.5 billion, or C$2.26 a share, a year earlier. Adjusted per-share earnings totaled C$1.04 a share, missing the C$1.27 average estimate of 12 analysts in a Bloomberg survey.

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