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BMO profit falls on loan provisions

Globe and Mail Update

Bank of Montreal kicked off second-quarter earnings season for the banks on Tuesday with profits of $358-million, a decrease of $284-million from the same period a year ago, as provisions for bad loans rose and softness in the stock market hurt the bank's mutual fund and investment businesses.

Adjusted cash earnings per share, of 93 cents, came in slightly above analysts' expectations.

“BMO's results were solid and better than most market participants anticipated,” Dundee Capital Markets analyst John Aiken said.

Bank of Montreal chief executive officer Bill Downe said in a press release that conditions remain challenging in credit and capital markets, but the bank is positioned to cope with them.

The bank's results exceeded RBC Capital Markets analyst Andre-Philippe Hardy's low expectations, but reflect a difficult environment given that the core return on equity was 12.3 per cent, Mr. Hardy said.

With the recession taking its toll on the financial health of both consumers and businesses, BMO ratcheted up the amount of funds it sets aside for loans that have gone sour. Its provisions for credit losses increased by $221-million from a year ago, to $372-million. About $245-million of that related to lending in the United States, and $127-million to Canada.

The provisions actually declined slightly from the prior quarter, surprising analysts, but the bank cautioned that it expects the credit environment to continue to be challenging through 2009 as the global economy remains weak.

Mr. Aiken said he expected the bank to set aside even more this quarter for troubled loans. Consumer banking “continues to weaken with commercial and corporate starting to show weakness, meaning that even if provisions are low for the second quarter, it is unlikely they will remain there for long,” he said in a note to clients.

BMO bolstered its financial cushion, bringing its Tier 1 capital ratio to 10.7 per cent, well above the minimum level required by regulators. The bank left its dividend unchanged at 70 cents per share. Most financial institutions have held off raising their dividend in the midst of the market turmoil in an effort to preserve capital.

Mr. Downe said that the quarter included $118-million of severance costs resulting from his efforts to simplify the bank's management structure, and reduce layers within the organization. The savings from those moves should be significant going forward, he suggested.

BMO's core personal and commercial banking operations in Canada saw profits rise 9.1 per cent, to $350-million. The bank closed its 68 grocery store kiosk locations during the quarter, deciding that customers preferred to use full-service branches.

In contrast, BMO's U.S. lending business posted a 31 per cent slide in earnings, to $21-million (U.S.). “The weak credit environment continues to affect results as there are higher levels of non-performing loans and the costs of managing this portfolio have increased,” the bank stated.

Profits from its private client group also fell, to $62-million (Cdn) from $107-million a year ago, as turbulent stock markets and low interest rates took a bite out of performance. Lower assets in the bank's mutual fund business resulted in lower revenue, and fees in the full-service investing operation dropped. Assets under management in the division fell by 8.7 per cent, or $21-billion.

During the quarter the bank paid $330-million for AIG Life Insurance Co. of Canada, which it has renamed BMO Life Assurance, putting it among the top 10 Canadian life insurers ranked by market share.

Bank of Montreal's investment banking arm, BMO Capital Markets, saw earnings rise by $62-million or 33 per cent to $249-million on higher profit margins and lending fees in corporate banking, better equity underwriting fees, and lower expenses. The bank took $117-million in net pre-tax charges relating to the rocky capital markets environment. It took a $215-million hit because of its commercial paper trust Apex, which was partially offset by a gain of $98-million relating to credit valuation.

In its outlook, BMO cautioned that “despite record low interest rates, growth in consumer spending and personal credit should continue to slow in the face of rising unemployment. Business investment and loan growth are expected to decline sharply in response to last year's downturn in commodity prices and further restructuring in the auto industry.”

The bank securitized, or sold, $950-million worth of residential mortgages during the quarter. By taking the low-profit-margin mortgages off of its balance sheet, the bank was able to boost its margins in its Canadian lending operations.

Mr. Aiken said that “there was nothing too troubling or surprising in BMO's results, which will likely translate to the other banks. This will allow the banks to sustain their valuations in the near term after the strong run over the past three months.”

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