02 March 2006

BMO Q1 2006 Earnings

BMO chief Comper to make Midwest acquisitions a priority in final year

Canadian Press, James Stevenson, 2 March 2006

Calgary (CP) - In his final year at the helm of Bank of Montreal, Tony Comper is making further acquisitions in the U.S. Midwest "a personal priority."

Comper, who has spent seven years as president and chief executive of BMO Financial Group, said Thursday that he plans to retire by his 62 birthday in April 2007. Speaking to BMO's annual meeting, he reiterated the bank's goal of making its Chicago-based Harris Bank subsidiary a "super-regional player."

He hopes to double Harris's branch count to 400 within five years through organic growth and acquisitions.

Toronto-based BMO has been open about its desire for further acquisitions in Canada and the United States, and has mentioned having a war chest of up to $2 billion for the right deals.

Comper also told shareholders the bank is "keeping a keen eye" on China.

BMO was the first Canadian bank to open a branch in Beijing a decade ago and owns 28 per cent of one of China's largest mutual fund companies. Recent reports have said BMO is interested in buying a stake in Haitong Securities, China's fourth-largest brokerage house.

But Comper said after the meeting that the bank will be opportunistic and is prepared to wait.

"It's one thing to be anxious to want to be an acquirer; it's another thing for the potentially acquired companies to want to be acquired," he said.

"And sometimes, as they did a couple years ago, they kind of come in bunches, and sometimes you get a little bit of a dry period."

Comper also said he is not optimistic that bank mergers - a political hot potato in Ottawa for at least eight years - will be "high on the agenda" of the minority Conservative government.

BMO, Canada's fourth-largest bank by stock market value, is regarded as likely to attract rich bidding if Ottawa clears the way for mergers.

It reported first-quarter profits of $630 million or $1.22 per share, up from $602 million or $1.16 per share in the year-ago period.

Core cash earnings of $1.24 per share beat the analyst consensus expectation of $1.21, thanks to higher than expected trading revenues and lower than expected credit-loss provisions.

The bank also is increasing its quarterly dividend to 53 cents per share from 49 cents.

However, BMO shares pulled back $1.37 or two per cent to close at $66.88 in Thursday trading on the Toronto Stock Exchange.

The bank had planned to release its results Thursday just ahead of its annual meeting, but pushed the statement out Wednesday evening after an accidental distribution of results to bank employees.

"The investment banking division came in ahead of our estimates on strong trading revenues, while the personal and commercial banking segment came in below our expectations due to lower net interest income margins in Canada," Merrill Lynch analyst Andre-Philippe Hardy said in a research note.

"As expected, the dividend was raised by eight per cent. The bank has more than ample capital to undertake acquisitions in the U.S. Midwest."

Scotia Capital, 2 March 2006

BMO First Quarter Earnings

• Bank of Montreal (BMO) Q1/06 cash operating earnings increased 9% to $1.24 per share versus $1.13 per share a year earlier, ahead of expectations. Cash operating ROE was 18.7% versus 18.9% in the previous quarter and 19.0% a year earlier.

• Earnings growth was driven by record trading revenue of $231 million which added $0.09 per share to earnings versus strong trading revenue of $162 million in previous quarter.

• Core operating earnings were $1.13 per share, weaker than expected, excluding the $0.09 per share of incremental trading revenue as well as the $0.02 per share in security gains which we view as unsustainable given the very low level of unrealized security surplus of $4 million.

• We do not view the higher than expected first quarter earnings as high quality earnings.

Record Trading Revenue

• Trading revenue was a record $231 million in the first quarter with strength across all product lines. First quarter trading revenue was 170% of the average of the previous eight quarters.

• Trading revenue of $231 million increased 41% YOY from the $164 million level (high) representing an additional $0.09 per share in earnings.

Dividend Increased 8%

• The bank announced an 8% dividend increase to $2.12 per common share from $1.96 per common share.

Canadian Retail NIM Deteriorates 12 bp QOQ

• Canadian retail net interest margin (NIM) declined 12 basis points (bp) QOQ and 10 bp from a year earlier to 2.67% as P&C Canada's variable rate mortgage and loan portfolios were squeezed by rising short term rates. This is one of the largest declines in retail NIM and is contrary to the recent direction for the bank group.

• P&C Chicago earnings were essentially flat at $39 million compared with $38 million in the previous quarter and $36 million a year earlier.

Private Client Group Earnings

• Private Client Group (PCG) earnings in Q1 increased 16% QOQ and 14% YOY to $95 million.

• Mutual fund revenue was flat QOQ and increased 13% YOY to $115 million. Mutual fund assets under management (as reported by IFIC) increased 29% YOY to $31.6 billion.

Strong Investment Banking Group Earnings

• Investment Banking Group (IBG) Q1 earnings increased 12% YOY and 9% QOQ to $229 million, representing 36% of cash operating earnings, due to strong trading revenue.

• Capital markets revenue declined 6% to $350 million from $373 million in the previous quarter and was down 1% from $353 million a year earlier. Underwriting and advisory fees increased 13% YOY but declined 3% QOQ to $98 million while securities commissions and fees declined 5% YOY and 7% QOQ to $252 million.

Revenue Growth 5%; Expense Growth 5%

• Revenue growth was 5% YOY and expense growth was 5% YOY, excluding the impact of Harrisdirect.

Unrealized Security Surplus Negligible at $4 million

• Net investment security gains were $18 million or $0.02 per share in the quarter versus $0.04 per share in the previous quarter and $0.05 per share a year earlier.

• The bank’s unrealized security surplus (net of hedging derivatives) declined to $4 million versus $12 million in the previous quarter and $37 million a year earlier.

Loan Loss Provisions - 2006 Guidance Reduced to $325 million

• Specific loan loss provisions (LLPs) were $52 million or 0.14% of loans, versus $57 million, or 0.15% of loans in the previous quarter.

• The bank reduced its 2006 guidance for LLPs to $325 million from $400 million. Our 2006 LLP estimate remains unchanged at $325 million.

Tier 1 Capital

• Tier 1 ratio improved to 10.4% from 10.3% at the end of the previous quarter.

Share Buyback Activity Modest

• BMO repurchased 538,000 shares in the quarter at an average cost of $60.33 per share for $32.5 million.

Earnings Estimates Increased

• We are increasing our 2006 and 2007 cash earnings estimates to $4.90 per share and $5.25 per share from $4.80 per share and $5.15 per share, respectively due to the high level of trading revenue in Q106 and slight upward revisions to our trading revenue estimates for the rest of the year.

• Our 12-month share price target is $72, representing 14.7x our 2006 earnings estimate and 13.7 x our 2007 earnings estimate.


• We maintain our 2-Sector Perform recommendation on the shares of BMO due to the bank's low risk profile offset by a premium P/E multiple that, in our view, is not substantiated given the level of profitability, capital, and business mix.