BMO kicks off bank earnings week with profit almost doubling to $1.3B

Bank of Montreal kicked off the quarterly earnings season for Canada's big banks with a bang on Wednesday, announcing that its profit more than doubled and the money it sets aside to cover bad loans fell by more than 90 per cent.

Money set aside for bad loans declined by more than 90 per cent

Bank of Montreal set aside far less money for bad loans this quarter, a sign it is more confident in the economic outlook for its customers. (Nathan Denette/The Canadian Press)

Bank of Montreal kicked off the quarterly earnings season for Canada's big banks with a bang on Wednesday, announcing that its profit more than doubled and the money it sets aside to cover bad loans fell by more than 90 per cent.

BMO said Wednesday its net income came in at just over $1.3 billion, up from $689 million a year ago.

Just about every facet of the bank's business made more money in the three-month period up to the end of April, from the core Canadian retail banking business to wealth management, capital markets and its U.S. unit.

Loan-loss provisions decrease

The profit jump came as the bank set aside far less money to cover bad loans.

Known as loan-loss provisions, Canadian banks spent most of the pandemic ratcheting that figure higher, to pay for loans they had given out and were worried may have to be written off.

This time last year, BMO had set aside more than $1.1 billion to cover potential bad loans.

But that figure has fallen as low as just $60 million, a sign the bank is far more confident in its outlook for its consumer and business clients.

"This quarter, we continued to deliver very strong results with all of our businesses performing well," CEO Daryl White said. "We enter the second half of the year with strong momentum."

Criticism over fee hikes

BMO's strong financial performance comes as the big banks as a whole are facing criticism for raising fees during the pandemic.

CBC News reported over the weekend about Canadians who are upset that their banks have hiked a variety of fees for basic banking services.

BMO's numbers show that the bank is indeed raking in more money from fees than they previously did. In the last quarter, BMO took in $1.598 billion in so-called core fees, according to CIBC banking analyst Paul Holden. This quarter, the bank took in $1.643 billion of such fees — an increase of $45 million. Card fees alone rose from $81 million last quarter to $122 million in this one.

Canadian house prices have hit record highs in the pandemic, driven partly by record low mortgage rates. (Sean Kilpatrick/The Canadian Press)

Those profits also come against the backdrop of rising concern over Canada's housing market, as record-low interest rates have pushed prices up to record highs and stretched affordability thinner than ever.

Next week, new stress test rules designed to make it harder to qualify for a home loan will come in, and in a conference call with analysts on Wednesday, BMO said it will be taking a closer look at new applications in areas where prices are especially high.

According to data compiled by Bloomberg Intelligence analyst Paul Gulberg, BMO has less exposure to residential mortgages than some other big Canadian banks, with about $130 billion — or a third of all of its loans — tied to residential real estate. That compares to more than half the loans at rivals Royal and CIBC.

Which could be why the bank isn't overly concerned about its exposure to an increasingly vulnerable housing market. "We can assume, just given what we're seeing right now in housing prices and sales, that there will be some moderation," Erminia Johannson, BMO's group head of North American personal and business banking, said on a conference call with analysts discussing the bank's quarter.

"But it will still remain a fairly robust mortgage market in Canada, for sure, over the next little while."

No dividend hike

Under normal circumstances, a bank being flush with cash would likely hike its dividend to shareholders.

But BMO didn't do that, holding the payout steady at $1.06 per share, because it is not allowed to increase its dividend under current rules the banking regulator OSFI put on the industry as a precaution in March 2020. 

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