Bank of Montreal Reports Satisfactory fiscal Q1 earnings

Narrow-moat Bank of Montreal BMO reported satisfactory fiscal first-quarter earnings. Adjusted earnings per share were CAD 3.22, representing a year-over-year decline of 17%, primarily driven by higher expenses and higher provisioning. Bank of Montreal was able to grow adjusted revenue sequentially once again, and more importantly, adjusted net interest income was also able to grow sequentially. So far (half way through Canadian bank earnings), Bank of Montreal is the only Canadian bank to pull this off. Management stuck to its outlook for positive operating leverage for the year along with slowing expense growth in the second half of 2023. With results generally coming in close to our expectations and no major changes to the expected benefits from the recently closed (Feb. 1) Bank of the West acquisition, we do not expect to make a material change to our fair value estimate of CAD 144/USD 107. The bank seems set to go through a transitionary period of cost savings and one-time charges before reaching its true profitability potential. Cost savings should be finished in around a year, while management expects revenue synergies to be more apparent by the end of 2025.

We expect this quarter and this year to be a bit of a transition year for the Canadian banks. Loan growth is likely to slow, more credit strain to emerge, and net interest income remains in a state of flux as rate changes slowly feed through the balance sheets. Many of these patterns were present for Bank of Montreal in the quarter, with average loans up 2% sequentially compared with a 15% year-over-year growth rate, and adjusted net interest margin compressing slightly in the quarter. For credit, the overall allowance for credit losses ratio ticked up slightly and delinquency rates and charge-off rates continued to creep up in multiple portfolios. These numbers are still below what we would expect in a true recessionary environment, but there are signs of potentially the start of the next credit cycle.