Bank of Montreal Earnings: Revenue Growth Still Slow, but Expense Picture Should Gradually Improve

Narrow-moat-rated Bank of Montreal BMO reported OK fiscal third-quarter earnings. As expected, results remained quite messy with multiple one-time charges, and an impairment charge of CAD 45 million is forecast for next quarter. Excluding the impact of Bank of the West, adjusted preprovision pretax income would have been down 4% year over year. As we have seen with peers, the environment in Canada remains more constructive than in the United States. The U.S. segment’s net interest margin was down once again, while Canadian NIM and preprovision pretax income were both up sequentially. We do not expect the pressure in the U.S. to completely abate, although if the Federal Reserve refrains from further interest-rate hikes, the pressure should ease over the next quarter or two.

Management struck a positive tone on the call about realizing additional revenue synergies, although in our experience these types of synergies are notoriously difficult to pin down. The bank took some severance-related charges in the quarter, which it expects will lead to savings of roughly CAD 250 million by early 2025. It also made some moves on its real estate footprint, which are expected to lead to savings of CAD 400 million. Combined, this should be another roughly 3% savings on the current expense run rate. The bank expects to achieve positive operating leverage in 2024, which we were already expecting, even on an adjusted basis.

Because results are largely tracking our expectations, with the main difference being the one-time severance charges, we are maintaining our CAD 136/$100 fair value estimate. Results will remain a bit messy for now, but we expect the expense picture to improve throughout 2024 and into early 2025.