Bank of Montreal profit sinks as more than $1.1-billion earmarked to cover potential loan losses

Bank of Montreal reported a 54-per-cent plunge in second-quarter profit as it earmarked more than $1.1-billion to cover potential losses on loans amid the coronavirus pandemic.

Profit for the three months that ended April 30 was $689-million, or $1 per share, compared with $1.5-billion, or $2.26 per share, a year earlier.

Adjusted for certain items, BMO said it earned $1.04 per share, which fell short of analysts' expectations of $1.37 per share, according to Refinitiv.

The bank held its dividend steady at $1.06 per share.

“While COVID-19 had a meaningful impact on the bank’s earnings in the current quarter, the bank’s operational performance remains solid,” chief executive officer Darryl White said in a statement.

Total loan loss provisions surged 535 per cent higher, from $176-million a year ago, when BMO recorded unusually low provisions after an impaired commercial loan in its U.S. banking arm recovered. Much of the increase – a total of $705-million – was from provisions on loans that are still being paid back, but which the bank’s forecasts suggest could be at risk due to deteriorating economic conditions as a result of COVID-19.

BMO also disclosed that it has granted payment deferrals to clients on more than 188,000 retail loans in Canada, worth $21.7-billion, and a further 7,400 Canadian commercial loans worth $15.1-billion. In the U.S., the bank also granted deferrals on 21,400 retail loans worth $1.1-billion and 1,100 commercial loans adding up to $3.6-billion.

The bank's common equity Tier 1 (CET1) ratio, which is a key measure of a bank's strength and resilience, fell to 11 per cent, from 11.4 per cent in the prior quarter. But that is comfortably above the minimum of 9 per cent set by Canada's banking regulator.

Profit from BMO's retail banking division fell to $361-million, from $616-million a year ago. Higher provisions for credit losses were the driving factor, even as the division reported higher revenue.

Provisions for loan losses also dragged down earnings in the bank's U.S. retail banking arm, to $339-million compared from $406-million a year ago, and in capital markets, which lost $74-million, after earning $250-million a year ago. While provisions accounted for 90 per cent of the decline in capital markets, revenue was lower from both markets as well as investment and corporate banking.

In BMO's wealth management division, profit fell to $144-million, from $305-million a year ago, mostly because of provisions set aside to cover potential payouts from a class action lawsuit the bank is appealing.

BMO’s return on equity fell to 5.3 per cent, from 13.6 per cent a year earlier.

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