Toronto StarScotia Capital, 23 August 2006
Strong Third Quarter Earnings
• Bank of Montreal (BMO) reported Q3/06 cash operating earnings of $1.30 per share, better than expected due to a strong 7 basis point improvement in the Canadian Retail net interest margin, continued strong trading revenue and a decline in loan loss provisions to an extremely low level of 11 basis points.
• Operating ROE improved to 19.1% from 17.3% a year earlier with return on risk-weighted assets increasing to 1.65% versus 1.48%.
• Reported cash earnings were $1.40 per share which included a tax recovery of $26 million or $0.05 per share and a gain on the MasterCard International IPO of $38 million ($25 million after tax or $0.05 per share).
• Earnings growth of 18% was led by the Private Client Group at 21% and a significant improvement in Corporate and Other due to LLP recoveries. Investment Banking Group (IBG) earnings increased 9%, with Personal and Commercial Client Group (PCCG) earnings up a moderate 5%.
Personal and Commercial Client Group (PCCG) Earnings
• PCCG earnings increased 5% YOY to $332 million (excluding the $26 million tax recovery and $25 million after tax gain on the MasterCard IPO).
P&C Canada
• P&C Canada earnings increased 5% YOY to $294 million (excluding $26 million income tax recovery and $25 million after tax gain on the MasterCard International IPO) driven by 9% YOY growth in average loans and acceptances, partially offset by a 7 bp decline in the retail NIM.
• P&C Canada earnings rebounded by 13% QOQ due mainly to the 7 bp increase in NIM and the greater number of days in the quarter.
• Revenue increased 8% YOY while expenses were up 10% due to the expanded workforce and project initiatives.
• Securitization revenues were $21 million, compared to $4 million in the previous quarter and $26 million a year earlier. Insurance revenue was $58 million, an increase of 14% QOQ and 32% from a year earlier. Deposit and service fees increased 4% sequentially but were essentially unchanged YOY at $187 million.
Canadian Retail NIM Improves 7 bp QOQ; But Still Down YOY
• Canadian retail NIM improved 7 bp to 2.69% versus 2.62% in the previous quarter due to a more disciplined pricing policy in certain deposit categories, a mix shift to higher-spread products and increased mortgage refinancing fees.
• Although retail NIM rebounded in the quarter, it is still down 7 bp YOY from 2.76% a year earlier.
• Overall NIM for the bank was 1.89% versus 1.82% in the previous quarter and 1.96% a year earlier.
P&C Chicagoland Earnings Flat
• P&C Chicagoland earnings were $38 million, unchanged from a year earlier. The productivity ratio was 70.7% versus 70.5% a year earlier.
Private Client Group (PCG) Earnings Up 21% YOY
• Private Client Group (PCG) earnings in Q3/06 increased 21% YOY to $86 million driven by strong AUM growth with very favourable operating leverage of 10%.
Mutual Fund Revenue Up 13% YOY
• Mutual fund revenue was $128 million in the quarter, a 13% YOY increase. Mutual fund assets under management (as reported by IFIC) increased 17% YOY to $33 billion.
IBG Earnings Increase 9% YOY
• IBG earnings increased 9% YOY to $201 million, however they declined 18% from the very strong second quarter. IBG experienced 13% YOY growth in average loans and acceptances.
Trading Revenue Solid
• Trading revenues increased 31% YOY to $172 million versus $131 million a year earlier. Trading levels remained very high, near Q2 levels of $179 million although down from Q1 record of $231 million.
Capital Market Revenues Increase Slightly
• Capital market revenue increased a modest 1% YOY to $352 million, however it declined 13% from the very strong second quarter. Underwriting revenue of $92 million was unchanged from a year earlier and down 19% sequentially. Securities commissions and fees of $260 million increased a modest 2% YOY and declined 11% QOQ.
Security Gains Modest; Surplus Negligible
• Net investment security gains were $13 million (excluding the $38 million or $0.05 per share after tax gain on the MasterCard IPO) 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 securities surplus was $5 million (net of hedging derivatives) versus a deficit of $15 million in the previous quarter.
Revenue Growth 5%; Expense Growth 3%
• Revenues (excluding unusual items) increased 5% YOY to $2.6 billion while non-interest expenses grew 3% to $1.6 billion.
• The bank's productivity ratio was 62.0% compared with 61.8% in the previous quarter and 63.3% a year earlier.
Loan Loss Provisions Remain Extremely Low
• Specific loan loss provisions (LLPs) in Q3 were $42 million or 0.11% of loans, versus $73 million or 0.20% of loans a year earlier and $66 million or 0.18% of loans in the previous quarter.
• LLPs year-to-date in 2006 are $160 million comprised of $235 million for P&C Canada, $23 million for P&C Chicagoland, $2 million for PCG, $60 million for IBG with a recovery of $160 million in Corporate & Other.
• The bank reduced its specific LLP forecast to $250 million from $325 million. We are reducing our 2006 LLP estimate to $230 million or 0.15% of loans from $275 million or 0.17% of loans.
• We are also reducing our 2007 LLP estimate to $320 million or 0.20% of loans from $400 million or 0.25% of loans, reflecting the benign credit environment.
• Gross impaired loans were $663 million compared with $771 million in the previous quarter.
Earnings Sensitivity to Higher Loan Loss Provisions
• The bank's low level of LLPs in 2006 is expected to be very supportive to earnings. If 2006 LLPs come in at $230 million or 15 bp, this would represent an earnings pick up of $0.21 per share from the 25 bp level (other major banks) and $0.42 per share from a 35 bp level.
Tier 1 Capital
• Tier 1 ratio was stable at 10.1%.
Share Buyback Activity Modest
• During the quarter, BMO repurchased 2.545 million shares for $158 million or $61.90 per share.
Recent Events
• On June 6, BMO announced the appointment of Frank Techar as President and CEO, Personal and Commercial Banking Canada, effective July 1, 2006. This position was formerly held by Rob Pearce. Mr. Techar had headed BMO's P&C Banking in the U.S. since 2002 as President and CEO of Harris Bankcorp.
• On July 19, BMO announced the appointment of Ellen Costello as CEO of Harris Bankcorp. She replaces Frank Techar who was recently made President and CEO, Personal and Commercial Banking in Canada. Ms. Costello had previously held the position of Vice-Chair and Head, BMO Capital Markets, New York.
• On August 3, BMO announced its intention to acquire bcpbank Canada, a full-service chartered bank owned by Millennium bcp of Lisbon, Portugal for $41 million. Bcpbank Canada has a network of eight retail bank branches, seven of which are located in the Greater Toronto Area.
Earnings Estimates Increased
• We are increasing our 2006 and 2007 earnings estimates to $5.05 per share and $5.35 per share from $4.90 per share and $5.25 per share, respectively to reflect the low level of loan loss provisions and improved retail NIM.
• Our 12-month share price target is $72, representing 14.3x our 2006 earnings estimate and 13.5x our 2007 earnings estimate.
Recommendation
• Maintain 3-Sector Underperform rating on shares of BMO based on near bank market P/E multiple and below industry profitability despite extremely low loan loss provisions as well as a weaker growth platform.
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BMO Capital Markets, 23 August 2006
BMO Financial Group reported third-quarter cash earnings of $713 million, or $1.40 per share, compared to $652 million, or $1.27 per share, in the previous quarter and $558 million, $1.10 per share, in the same quarter of last year. This quarter included two unusual items – a pre-announced gain on the MasterCard IPO of $25 million (after tax) and a tax recovery of $26 million. These items added $0.10 to EPS. It is also noteworthy that the bank changed its accounting for stock options in the quarter, impacting the timing of profits. It bolsters earnings in the second, third and fourth quarter (by about $0.02 each) and lowers the first quarter ($0.05).
All in, we believe the appropriate comparison is $1.30 per share in this quarter, compared to $1.27 per share in the previous quarter and $1.10 in the same quarter of last year. We were forecasting cash EPS for the quarter of $1.27. The better than expected results came from (finally) solid spreads in the domestic Personal and Commercial Bank.
The Personal and Commercial Group reported strong earnings growth over both the linked quarter and the same quarter of last year. The higher Canadian P&C Bank results were partially due to a $25 million (after-tax) gain on the MasterCard IPO and a $26 million tax recovery. Outside of these one-time items, however, operating results were still solid, up 5%. Loan growth was strong but the story was spreads. After stumbling for two quarters, recent moves on pricing appear to have borne fruit. Spreads increased 8bp versus the second quarter. It is particularly encouraging to see progress on spreads, without any meaningful impact on market share. Expenses were higher than expected as a result of an expansion in the sales force and increased marketing expenditures.
The Chicagoland Bank (Harris) results came in higher than the disappointing second quarter, but flat over the year partially due to the continuing currency headwinds. Spreads continued to erode over the quarter, reflecting the challenging U.S. interest rate environment as well as faster loan growth than deposit growth. Expenses, however, remained well-controlled despite acquisition-related costs (Villa Park) and the bank’s technology expansion initiatives.
The Private Client Group reported somewhat lower results from the previous quarter reflecting seasonality and continued disappointing results in the U.S. Earnings of $86 million were down from last quarter’s $98 million but up from last year’s $71 million. Additional expenses in the U.S. resulted in a loss in this business this quarter. We continue to believe that BMO has a solid defendable franchise in Canada.
The Investment Banking Group reported somewhat weaker results of $201 million, down from $245 million in the previous quarter but up from $184 million in the same quarter of last year. We view this as a solid quarter in a less than robust environment. Deal volumes were down substantially but this was offset by solid trading revenues and good U.S. securitization revenues. We believe that quarterly earnings in the $200–225 million range appear sustainable in the foreseeable future.
The Corporate segment reported higher than expected earnings of $49 million, compared to $23 million in the second quarter and a loss of $8 million in the same quarter of last year. This segment is difficult to analyse, as it includes many contra-items offsetting results in the various segments. Having said that, the two big items this quarter were loan loss reversals of $65 million and an adjustment to taxes booked within the various divisions. Loan loss reversals will decline over time (i.e., loan losses in aggregate will increase), but the benefits of tax planning appear to be recurring. We believe that the outlook is for a more robust contribution from this segment than we had previous expected.
One note on taxes. BMO continues to reduce its estimate for a “sustainable” tax rate. In the third quarter of a year ago, the estimated range was set at 31–32%. In the fourth quarter it was lowered to 30–32% and then in the first and second quarter of 2006 it was lowered again to 29–31%. This quarter, the bank again revised the range, down to 28–30%. Even with these reductions, the bank continues to beat the streets expectations on tax rates. This quarter (excluding the tax recovery in domestic P&C), the tax rate was 27%. Broadly speaking, we do not view this variation as meaningful other than to say that there is clearly some value for BMO shareholders from a lower “effective” tax rate. BMO’s tax rate is not low by industry standards.
The performance was very strong on the credit front. The bank’s credit position remains impressive. Gross impaired loan balances continued to decline meaningfully, from already historically low levels. Specific provisions were $42 million, down from $66 million last quarter and $73 million in the same quarter of last year. Management also lowered its 2006 guidance (again) from “$325 million or less” to “$250 million or less”. Given recent trends, we believe that the “or less” portion of annual guidance looks likely.
BMO’s Tier 1 declined slightly in the quarter, reflecting the effect of growth in risk-weighted assets, share buybacks and dividends. Specifically on the RWA issue, credit RWAs grew but so did derivative RWAs and market RWAs. The last of these appears to be driven by higher VaR associated with the trading businesses. In a more volatile environment going forward, it will be interesting to see whether this incremental risk is a good decision.
Projections and Valuation
With the higher earnings in the third quarter, we are raising our Cash EPS estimate for 2006 to $5.10 from $5.00. For next year, we are modestly increasing our estimate from $5.30 (the high on the street) to $5.35. We note that our forecast earnings growth in 2007 is modest as we expect loan losses to rise and do not anticipate that the unusual items (tax recovery, MasterCard gain) will be repeated.
Having said that, the bank is incurring costs to enhance its retail franchises in Canada and the U.S., and this should pay off in coming quarters as volumes will likely remain strong. In addition, given the bank’s credit risk pedigree, one should assume that BMO will manage through the next credit cycle better than most.
We maintain our Market Perform rating on BMO shares, despite this earnings surprise. The real opportunity for BMO will be to more aggressively build out its U.S. platform. While this may create short-term weakness, there is little doubt that it would position the bank better for the long term. Until there is progress on this front, we continue to prefer investments in TD and BNS (with their better non-Canadian growth opportunities) and CM (at its lower valuation).
BMO Financial Group reported third-quarter cash earnings of $713 million, or $1.40 per share, compared to $652 million, or $1.27 per share, in the previous quarter and $558 million, $1.10 per share, in the same quarter of last year. This quarter included two unusual items – a pre-announced gain on the MasterCard IPO of $25 million (after tax) and a tax recovery of $26 million. These items added $0.10 to EPS. It is also noteworthy that the bank changed its accounting for stock options in the quarter, impacting the timing of profits. It bolsters earnings in the second, third and fourth quarter (by about $0.02 each) and lowers the first quarter ($0.05).
All in, we believe the appropriate comparison is $1.30 per share in this quarter, compared to $1.27 per share in the previous quarter and $1.10 in the same quarter of last year. We were forecasting cash EPS for the quarter of $1.27. The better than expected results came from (finally) solid spreads in the domestic Personal and Commercial Bank.
The Personal and Commercial Group reported strong earnings growth over both the linked quarter and the same quarter of last year. The higher Canadian P&C Bank results were partially due to a $25 million (after-tax) gain on the MasterCard IPO and a $26 million tax recovery. Outside of these one-time items, however, operating results were still solid, up 5%. Loan growth was strong but the story was spreads. After stumbling for two quarters, recent moves on pricing appear to have borne fruit. Spreads increased 8bp versus the second quarter. It is particularly encouraging to see progress on spreads, without any meaningful impact on market share. Expenses were higher than expected as a result of an expansion in the sales force and increased marketing expenditures.
The Chicagoland Bank (Harris) results came in higher than the disappointing second quarter, but flat over the year partially due to the continuing currency headwinds. Spreads continued to erode over the quarter, reflecting the challenging U.S. interest rate environment as well as faster loan growth than deposit growth. Expenses, however, remained well-controlled despite acquisition-related costs (Villa Park) and the bank’s technology expansion initiatives.
The Private Client Group reported somewhat lower results from the previous quarter reflecting seasonality and continued disappointing results in the U.S. Earnings of $86 million were down from last quarter’s $98 million but up from last year’s $71 million. Additional expenses in the U.S. resulted in a loss in this business this quarter. We continue to believe that BMO has a solid defendable franchise in Canada.
The Investment Banking Group reported somewhat weaker results of $201 million, down from $245 million in the previous quarter but up from $184 million in the same quarter of last year. We view this as a solid quarter in a less than robust environment. Deal volumes were down substantially but this was offset by solid trading revenues and good U.S. securitization revenues. We believe that quarterly earnings in the $200–225 million range appear sustainable in the foreseeable future.
The Corporate segment reported higher than expected earnings of $49 million, compared to $23 million in the second quarter and a loss of $8 million in the same quarter of last year. This segment is difficult to analyse, as it includes many contra-items offsetting results in the various segments. Having said that, the two big items this quarter were loan loss reversals of $65 million and an adjustment to taxes booked within the various divisions. Loan loss reversals will decline over time (i.e., loan losses in aggregate will increase), but the benefits of tax planning appear to be recurring. We believe that the outlook is for a more robust contribution from this segment than we had previous expected.
One note on taxes. BMO continues to reduce its estimate for a “sustainable” tax rate. In the third quarter of a year ago, the estimated range was set at 31–32%. In the fourth quarter it was lowered to 30–32% and then in the first and second quarter of 2006 it was lowered again to 29–31%. This quarter, the bank again revised the range, down to 28–30%. Even with these reductions, the bank continues to beat the streets expectations on tax rates. This quarter (excluding the tax recovery in domestic P&C), the tax rate was 27%. Broadly speaking, we do not view this variation as meaningful other than to say that there is clearly some value for BMO shareholders from a lower “effective” tax rate. BMO’s tax rate is not low by industry standards.
The performance was very strong on the credit front. The bank’s credit position remains impressive. Gross impaired loan balances continued to decline meaningfully, from already historically low levels. Specific provisions were $42 million, down from $66 million last quarter and $73 million in the same quarter of last year. Management also lowered its 2006 guidance (again) from “$325 million or less” to “$250 million or less”. Given recent trends, we believe that the “or less” portion of annual guidance looks likely.
BMO’s Tier 1 declined slightly in the quarter, reflecting the effect of growth in risk-weighted assets, share buybacks and dividends. Specifically on the RWA issue, credit RWAs grew but so did derivative RWAs and market RWAs. The last of these appears to be driven by higher VaR associated with the trading businesses. In a more volatile environment going forward, it will be interesting to see whether this incremental risk is a good decision.
Projections and Valuation
With the higher earnings in the third quarter, we are raising our Cash EPS estimate for 2006 to $5.10 from $5.00. For next year, we are modestly increasing our estimate from $5.30 (the high on the street) to $5.35. We note that our forecast earnings growth in 2007 is modest as we expect loan losses to rise and do not anticipate that the unusual items (tax recovery, MasterCard gain) will be repeated.
Having said that, the bank is incurring costs to enhance its retail franchises in Canada and the U.S., and this should pay off in coming quarters as volumes will likely remain strong. In addition, given the bank’s credit risk pedigree, one should assume that BMO will manage through the next credit cycle better than most.
We maintain our Market Perform rating on BMO shares, despite this earnings surprise. The real opportunity for BMO will be to more aggressively build out its U.S. platform. While this may create short-term weakness, there is little doubt that it would position the bank better for the long term. Until there is progress on this front, we continue to prefer investments in TD and BNS (with their better non-Canadian growth opportunities) and CM (at its lower valuation).
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RBC Capital Markets, 23 August 2006
Event
We are raising our price target $3 to $67, but are holding our rating at Underperform to reflect low growth potential and high relative valuation.
Investment Opinion
• Strong Q3/06 Not Likely To Extend in Q4/06. BMO posted $1.40 cash EPS or $1.30 normalized, but we think sustainable EPS was $1.24. This to $1.20 consensus, and RBCCM at $1.19. Our ‘underlying’ EPS at ~$1.24 matched Q2/06 and indicates ~13% YoY growth, but we estimate would have only been up 8% YoY excluding the YoY jump in trading revenue. Also strong were retail mortgage prepayment fees, likely above their normal range. Our Q4/06 estimate remains $1.20 as we expect investment banking and wealth net income to be seasonally challenged.
• Raising ’07 Estimate 4%, Target Up $3 to $67. We are raising our 2007 estimate by 4% from $5.15 to $5.35 to now reflect 8% growth YoY. Our adjustment reflects: (i) extended low loan loss provisions, and (ii) slightly higher Net interest margin. Our new $67 price target is calculated at 12.5x (unchanged) our $5.35 forward EPS estimate. We are also introducing our 2008 cash EPS estimate at $5.81, indicated up 8.5% YoY.
• Segment Summary. Domestic P&C bank earnings grew 5% YoY, as higher costs mitigated stabilizing spread. Wealth income growth slowed to 13% YoY. Wholesale earnings were up 9% on strong trading revenue.
• Credit Excellent Again. Earnings benefited from $65MM in loan losses recovered/reversed. Impaired loans fell 14% in quarter, and formations remained low. Reserve coverage improved to 167% from 145% in Q2/06.
• Valuation. Our $67 price target of 12.5x our $5.35 2007 cash EPS estimate factors a 4% discount to our sector target P/E multiple. In our view, BMO‘s domestic retail bank will be challenged to hold market share. The potential for a U.S. community bank acquisition is rising. BMO remains vulnerable to a depreciating USD. Our price target is indicated at ~2.1x our estimated book value of $31.66 (as at Oct 31/07). Our price target may be exceeded if domestic mergers become hot again, a very low probability in our view.
Risks to achieving our EPS estimates or price target include: (i) low wholesale market-sensitive potential, (ii) low-in-sector loan spread, (iii) unique exposure to the highly competitive Chicago market and (iv) reinvestment risk on a large acquisition in the United States.
Event
We are raising our price target $3 to $67, but are holding our rating at Underperform to reflect low growth potential and high relative valuation.
Investment Opinion
• Strong Q3/06 Not Likely To Extend in Q4/06. BMO posted $1.40 cash EPS or $1.30 normalized, but we think sustainable EPS was $1.24. This to $1.20 consensus, and RBCCM at $1.19. Our ‘underlying’ EPS at ~$1.24 matched Q2/06 and indicates ~13% YoY growth, but we estimate would have only been up 8% YoY excluding the YoY jump in trading revenue. Also strong were retail mortgage prepayment fees, likely above their normal range. Our Q4/06 estimate remains $1.20 as we expect investment banking and wealth net income to be seasonally challenged.
• Raising ’07 Estimate 4%, Target Up $3 to $67. We are raising our 2007 estimate by 4% from $5.15 to $5.35 to now reflect 8% growth YoY. Our adjustment reflects: (i) extended low loan loss provisions, and (ii) slightly higher Net interest margin. Our new $67 price target is calculated at 12.5x (unchanged) our $5.35 forward EPS estimate. We are also introducing our 2008 cash EPS estimate at $5.81, indicated up 8.5% YoY.
• Segment Summary. Domestic P&C bank earnings grew 5% YoY, as higher costs mitigated stabilizing spread. Wealth income growth slowed to 13% YoY. Wholesale earnings were up 9% on strong trading revenue.
• Credit Excellent Again. Earnings benefited from $65MM in loan losses recovered/reversed. Impaired loans fell 14% in quarter, and formations remained low. Reserve coverage improved to 167% from 145% in Q2/06.
• Valuation. Our $67 price target of 12.5x our $5.35 2007 cash EPS estimate factors a 4% discount to our sector target P/E multiple. In our view, BMO‘s domestic retail bank will be challenged to hold market share. The potential for a U.S. community bank acquisition is rising. BMO remains vulnerable to a depreciating USD. Our price target is indicated at ~2.1x our estimated book value of $31.66 (as at Oct 31/07). Our price target may be exceeded if domestic mergers become hot again, a very low probability in our view.
Risks to achieving our EPS estimates or price target include: (i) low wholesale market-sensitive potential, (ii) low-in-sector loan spread, (iii) unique exposure to the highly competitive Chicago market and (iv) reinvestment risk on a large acquisition in the United States.
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The Globe and Mail, Sinclair Stewart, 23 August 2006Bank of Montreal set the pace yesterday for what is expected to be a buoyant third-quarter for the banking sector, reporting a 30-per-cent increase in profit that was underpinned, yet again, by the persistently blithe credit environment.
Credit has been one of the most important themes for the Big Six banks over the past few years, and unusually low levels of soured loans have helped them to increase profitability, even when some of their main business units have misfired.
Perhaps the most remarkable thing about this credit cycle is its resilience: Every time analysts or even the banks themselves predict gloomier times around the corner, they are confounded by better-than-anticipated credit quality. Some analysts had forecast the environment would turn more negative in the second half, but are now suggesting credit will continue to be stable until well into 2007.
"The read-through here is that loan losses will be lower than expected for everybody," Darko Mihelic, an analyst with CIBC World Markets Inc., said of BMO's results.
"It's going to be a good quarter for everybody," Mr. Mihelic said.
BMO's profit climbed to $704-million or $1.38 a share, diluted, from $541-million or $1.07 in the same period of last year. The improvement was broad-based, with better results in Canadian and U.S. retail banking, investment banking, and wealth management, although the latter two weakened somewhat from the second quarter because of softer markets.
A one-time gain on the sale of its stake in MasterCard and a tax recovery added about 10 cents to the bottom line this quarter; yet even without these items and the lower loan losses, BMO still turned a cash profit of about $1.25 -- 5 cents above average analyst estimates.
BMO is arguably the best among the country's banks at managing credit risk, so it wouldn't necessarily be a leading indicator for problems ahead. It incurred just $42-million in bad loan provisions during the quarter -- a drop of more than 40 per cent -- and for the second time this year it lowered its projected annual provisions. The bank is now saying it expects $250-million in provisions for 2006, down from the $325-million forecast after the first quarter, and the $400-million target established at the beginning of the year.
Bob McGlashan, BMO's chief risk officer, told analysts on a conference call yesterday that the availability of hedging tools, coupled with a deeper secondary market for loans, should help to cushion the impact of the next credit downturn, and result in loan-loss provisions increasing at a slower pace.
BMO's positive showing provided a slight boost for bank stocks yesterday on the Toronto Stock Exchange, with each of the six largest gaining less than 1 per cent. BMO was the biggest gainer, closing up 93 cents or 1.4 per cent to $66.35.
Although the banks' shares fell substantially in the initial stages of the quarter, they began staging a rebound at the beginning of July amid concerns that the sector had sold off too aggressively, and have climbed roughly 10 per cent since then. That rally, however, has still left them short of their 52-week highs, and there is a growing sentiment they will continue to rise in light of the positive economic and credit outlook.
"I still think they represent excellent value at these levels," said Robert Wessel, an analyst at National Bank Financial Inc.
Investment banking and wealth management results at BMO were both down from the second quarter, but there are expectations they could rebound in the final three months of the year, in part because of a summer pickup in mergers and acquisitions activity.
Profit margins across most business lines at BMO were down from a year ago, but they are beginning to improve from the second quarter, another sign pointing in the industry's favour.
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Canadian Press, Rita Trichur, 22 August 2006
The Bank of Montreal kicked off the big banks' third-quarter earnings season with a record-high profit of $710 million, up 30 per cent from last year, as its cornerstone retail banking division led the way with strong growth.
Canada's fourth-largest bank said Tuesday it is eager to step up its Canadian and U.S. operations, but is also keeping a keen eye on China which is preparing to fully open its financial system to foreign competition in early 2007.
"While our major focus remains very firmly on BMO's target markets in North America, we're also optimistic about the progress that we're making in expanding and deepening our long-standing presence in China," said CEO Tony Comper.
"And although our investments in China do not yet make a significant contribution to the bottom line, this management team is taking the steps necessary to secure BMO's long-term future in China's rapidly expanding financial services market."
BMO currently has operations in Beijing, Guangzhou, Hong Kong and Shanghai, and owns a minority stake in of one of China's largest mutual fund companies.
Last week, it announced a new Beijing office to expand its offering of investment and corporate banking services. That followed regulatory approval in July to provide full Renminbi local currency service from the capital.
The Toronto-based bank is also one of six global firms that will co-lead the $11.2-billion-US initial public offering for the Bank of China.
Reports earlier this year suggested that BMO was interested in buying stakes in Haitong Securities, China's fourth-largest brokerage house, and in Hefei City Commercial Bank.
Earlier in the day, BMO reported its latest quarterly profit amounted to $1.38 per diluted share, compared to year-earlier earnings of $547 million or $1.07 a share.
On a cash basis, earnings per share improved 27 per cent to $1.40. That beat an analyst forecast for $1.20 per share compiled by Thomson Financial.
Revenue increased 6.7 per cent to $2.6 billion.
"We had an excellent third quarter," Comper said. "I'm actually delighted with BMO's record performance." The Toronto-based bank, which continues to revel in tip-top credit quality, also lowered its annual loan-loss forecast, saying it now expects specific provisions for credit losses will total $250 million or less.
During the quarter, provisions for credit losses totalled $42 million, versus $73 million a year ago.
"I think it is challenging to maintain this level, going forward into 2007," said Brenda Lum, an analyst with Dominion Bond Rating Service.
On a segmented basis, the retail personal and commercial client group's net income increased by 22 per cent to a record $376 million.
Its Canadian retail operations, which contribute the bulk of that amount, benefited from volume growth, a low effective tax rate and a $38-million gain on the MasterCard initial public offering in the United States.
The division also enjoyed an eight basis-point improvement to its net interest margin - the difference between interest earned and expended - from last quarter.
In fact, retail NIM pressure is expected to ease slightly for all Canadian banks this quarter, given the Bank of Canada's recent pause on interest rate hikes.
Meanwhile, U.S. retail profits from its Chicago-based subsidiary Harris Bank improved by $1 million to $31 million, but its productivity ratio deteriorated.
"I continue to remain skeptical about Harris Bank," said Tom Kersting, a financial services analyst with brokerage Edward Jones. "You just see very little growth in bottom-line net income."
BMO's long-term goal is operate a network of 350 to 400 branches in the U.S. Midwest and is looking to achieve that through organic growth, branch expansions and acquisitions.
Executives said Tuesday the bank has about $3 billion of capital available for acquisitions, but many analysts believe the prospects for such a big U.S. deal have diminished.
They also point out that BMO continues to lose Canadian market share to larger rivals TD Bank and Royal Bank, which report their financial results Thursday and Friday, respectively. BMO shares gained 93 cents to close Tuesday at $66.35 on the Toronto Stock Exchange.
The Bank of Montreal kicked off the big banks' third-quarter earnings season with a record-high profit of $710 million, up 30 per cent from last year, as its cornerstone retail banking division led the way with strong growth.
Canada's fourth-largest bank said Tuesday it is eager to step up its Canadian and U.S. operations, but is also keeping a keen eye on China which is preparing to fully open its financial system to foreign competition in early 2007.
"While our major focus remains very firmly on BMO's target markets in North America, we're also optimistic about the progress that we're making in expanding and deepening our long-standing presence in China," said CEO Tony Comper.
"And although our investments in China do not yet make a significant contribution to the bottom line, this management team is taking the steps necessary to secure BMO's long-term future in China's rapidly expanding financial services market."
BMO currently has operations in Beijing, Guangzhou, Hong Kong and Shanghai, and owns a minority stake in of one of China's largest mutual fund companies.
Last week, it announced a new Beijing office to expand its offering of investment and corporate banking services. That followed regulatory approval in July to provide full Renminbi local currency service from the capital.
The Toronto-based bank is also one of six global firms that will co-lead the $11.2-billion-US initial public offering for the Bank of China.
Reports earlier this year suggested that BMO was interested in buying stakes in Haitong Securities, China's fourth-largest brokerage house, and in Hefei City Commercial Bank.
Earlier in the day, BMO reported its latest quarterly profit amounted to $1.38 per diluted share, compared to year-earlier earnings of $547 million or $1.07 a share.
On a cash basis, earnings per share improved 27 per cent to $1.40. That beat an analyst forecast for $1.20 per share compiled by Thomson Financial.
Revenue increased 6.7 per cent to $2.6 billion.
"We had an excellent third quarter," Comper said. "I'm actually delighted with BMO's record performance." The Toronto-based bank, which continues to revel in tip-top credit quality, also lowered its annual loan-loss forecast, saying it now expects specific provisions for credit losses will total $250 million or less.
During the quarter, provisions for credit losses totalled $42 million, versus $73 million a year ago.
"I think it is challenging to maintain this level, going forward into 2007," said Brenda Lum, an analyst with Dominion Bond Rating Service.
On a segmented basis, the retail personal and commercial client group's net income increased by 22 per cent to a record $376 million.
Its Canadian retail operations, which contribute the bulk of that amount, benefited from volume growth, a low effective tax rate and a $38-million gain on the MasterCard initial public offering in the United States.
The division also enjoyed an eight basis-point improvement to its net interest margin - the difference between interest earned and expended - from last quarter.
In fact, retail NIM pressure is expected to ease slightly for all Canadian banks this quarter, given the Bank of Canada's recent pause on interest rate hikes.
Meanwhile, U.S. retail profits from its Chicago-based subsidiary Harris Bank improved by $1 million to $31 million, but its productivity ratio deteriorated.
"I continue to remain skeptical about Harris Bank," said Tom Kersting, a financial services analyst with brokerage Edward Jones. "You just see very little growth in bottom-line net income."
BMO's long-term goal is operate a network of 350 to 400 branches in the U.S. Midwest and is looking to achieve that through organic growth, branch expansions and acquisitions.
Executives said Tuesday the bank has about $3 billion of capital available for acquisitions, but many analysts believe the prospects for such a big U.S. deal have diminished.
They also point out that BMO continues to lose Canadian market share to larger rivals TD Bank and Royal Bank, which report their financial results Thursday and Friday, respectively. BMO shares gained 93 cents to close Tuesday at $66.35 on the Toronto Stock Exchange.
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Bloomberg, Sean B. Pasternak, 22 August 2006
Bank of Montreal, Canada's fourth- largest bank, said third-quarter profit rose 30 percent to a record as trading revenue almost doubled and the bank set aside less money for bad loans.
Net income for the quarter ended July 31 climbed to C$710 million ($656 million), or C$1.38 a share, from C$547 million, or C$1.07 a share, a year earlier, the Toronto-based bank said today. Revenue rose 6.6 percent to C$2.6 billion.
Bank of Montreal, the first Canadian bank to report third- quarter earnings, benefited from a surge in stock trading as mergers rose to a seven-year high. The value of trading on the Toronto Stock Exchange rose 42 percent in the first seven months of 2006 from a year earlier, to C$809 billion.
``With all the M&A, there are some nice capital markets fees,'' said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier Inc. in Toronto, which manages the equivalent of about $3.2 billion, including shares of Bank of Montreal. ``The credit environment is still favorable as corporations have more cash than they have opportunities.''
Profit at the bank's BMO Capital Markets unit rose 9 percent to C$201 million, while earnings at its private client group, which includes brokerage and investing services, rose 35 percent to C$85 million. Trading revenue climbed to C$163 million from C$83 million a year earlier.
Top Estimates
Robert Wessel, an analyst at National Bank Financial in Toronto, said the bank earned C$1.30 before one-time items, topping his C$1.19 a share estimate. The bank was expected to earn C$1.19 a share based on the median estimate of eight analysts polled by Bloomberg News.
``BMO's results suggest that trading and capital markets activity remains fairly healthy and credit quality remains exceptional,'' said Jason Bilodeau, an analyst at UBS Securities Canada, in a research note today.
Bank of Montreal shares rose for a sixth day, gaining 93 cents, or 1.4 percent, to C$66.35 at 4:10 p.m. trading on the Toronto Stock Exchange, the biggest gain in a month. The profit increase was the highest in two years, helping boost other bank shares. Royal Bank of Canada rose 36 cents to C$50.16 and Bank of Nova Scotia climbed 40 cents to C$48.86.
Bank of Montreal said consumer banking profit from Canada climbed 25 percent to a record C$345 million because of a C$26 million tax recovery and a C$25 million gain from the initial public offering of MasterCard Inc. shares.
U.S. consumer banking profit rose 3.3 percent to C$31 million. Profit at the unit has grown at less than half the rate of the Canadian consumer bank business over the past two years after the lender failed to make any significant acquisitions.
Comper
Chief Executive Officer Anthony Comper, 61, has said the bank may spend as much as $2 billion to expand the Harris Bank business in the Chicago area. The bank hasn't made a U.S. acquisition of more than C$100 million since December 2004.
``I remain relatively unimpressed with Harris Bank,'' said Tom Kersting, an analyst at Edward Jones & Co. in Des Peres, Missouri, who rates Bank of Montreal shares a ``hold''. Revenue at the business ``hasn't yet translated into significant earnings growth.''
To help find potential targets, Bank of Montreal this month promoted Ellen Costello, formerly a vice chairman at its BMO Capital Markets arm, to head consumer banking in the U.S.
The bank set aside C$42 million for bad loans in the quarter, less than analysts expected, and down from C$73 million a year earlier. Jim Bantis at Credit Suisse forecast provisions of C$71 million. The bank's overall tax rate dropped to 24.1 percent from 29.6 percent a year ago.
Targets
Bank of Montreal reiterated that it's on pace to top its financial targets for this year. Earnings per share for the first three quarters rose 15 percent, ahead of the bank's 5 percent to 10 percent growth target.
The bank's return on equity, a measurement of profitability, climbed to 20.3 percent from a year-earlier 16.8 percent. Bank of Montreal's ratio of capital to assets was 10.1 percent, up from 9.4 percent a year ago. The country's six largest banks have about C$10.2 billion in cash that can be used for acquisitions, according to Wessel.
Higher trading revenue and asset management fees probably led to average profit growth of about 10 percent in the third quarter for Canada's eight biggest banks, Bantis said.
The banks are benefiting from a rise in consumer loans, lower costs and falling tax rates, Bantis said in an Aug. 16 research note. Profit growth will range from 12 percent at Bank of Nova Scotia, the No. 3 bank, to 3 percent at National Bank of Canada, the sixth-biggest lender, Bantis said. He said Royal Bank of Canada and Toronto-Dominion Bank, the two biggest banks, will likely raise their dividends.
Bank of Montreal, Canada's fourth- largest bank, said third-quarter profit rose 30 percent to a record as trading revenue almost doubled and the bank set aside less money for bad loans.
Net income for the quarter ended July 31 climbed to C$710 million ($656 million), or C$1.38 a share, from C$547 million, or C$1.07 a share, a year earlier, the Toronto-based bank said today. Revenue rose 6.6 percent to C$2.6 billion.
Bank of Montreal, the first Canadian bank to report third- quarter earnings, benefited from a surge in stock trading as mergers rose to a seven-year high. The value of trading on the Toronto Stock Exchange rose 42 percent in the first seven months of 2006 from a year earlier, to C$809 billion.
``With all the M&A, there are some nice capital markets fees,'' said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier Inc. in Toronto, which manages the equivalent of about $3.2 billion, including shares of Bank of Montreal. ``The credit environment is still favorable as corporations have more cash than they have opportunities.''
Profit at the bank's BMO Capital Markets unit rose 9 percent to C$201 million, while earnings at its private client group, which includes brokerage and investing services, rose 35 percent to C$85 million. Trading revenue climbed to C$163 million from C$83 million a year earlier.
Top Estimates
Robert Wessel, an analyst at National Bank Financial in Toronto, said the bank earned C$1.30 before one-time items, topping his C$1.19 a share estimate. The bank was expected to earn C$1.19 a share based on the median estimate of eight analysts polled by Bloomberg News.
``BMO's results suggest that trading and capital markets activity remains fairly healthy and credit quality remains exceptional,'' said Jason Bilodeau, an analyst at UBS Securities Canada, in a research note today.
Bank of Montreal shares rose for a sixth day, gaining 93 cents, or 1.4 percent, to C$66.35 at 4:10 p.m. trading on the Toronto Stock Exchange, the biggest gain in a month. The profit increase was the highest in two years, helping boost other bank shares. Royal Bank of Canada rose 36 cents to C$50.16 and Bank of Nova Scotia climbed 40 cents to C$48.86.
Bank of Montreal said consumer banking profit from Canada climbed 25 percent to a record C$345 million because of a C$26 million tax recovery and a C$25 million gain from the initial public offering of MasterCard Inc. shares.
U.S. consumer banking profit rose 3.3 percent to C$31 million. Profit at the unit has grown at less than half the rate of the Canadian consumer bank business over the past two years after the lender failed to make any significant acquisitions.
Comper
Chief Executive Officer Anthony Comper, 61, has said the bank may spend as much as $2 billion to expand the Harris Bank business in the Chicago area. The bank hasn't made a U.S. acquisition of more than C$100 million since December 2004.
``I remain relatively unimpressed with Harris Bank,'' said Tom Kersting, an analyst at Edward Jones & Co. in Des Peres, Missouri, who rates Bank of Montreal shares a ``hold''. Revenue at the business ``hasn't yet translated into significant earnings growth.''
To help find potential targets, Bank of Montreal this month promoted Ellen Costello, formerly a vice chairman at its BMO Capital Markets arm, to head consumer banking in the U.S.
The bank set aside C$42 million for bad loans in the quarter, less than analysts expected, and down from C$73 million a year earlier. Jim Bantis at Credit Suisse forecast provisions of C$71 million. The bank's overall tax rate dropped to 24.1 percent from 29.6 percent a year ago.
Targets
Bank of Montreal reiterated that it's on pace to top its financial targets for this year. Earnings per share for the first three quarters rose 15 percent, ahead of the bank's 5 percent to 10 percent growth target.
The bank's return on equity, a measurement of profitability, climbed to 20.3 percent from a year-earlier 16.8 percent. Bank of Montreal's ratio of capital to assets was 10.1 percent, up from 9.4 percent a year ago. The country's six largest banks have about C$10.2 billion in cash that can be used for acquisitions, according to Wessel.
Higher trading revenue and asset management fees probably led to average profit growth of about 10 percent in the third quarter for Canada's eight biggest banks, Bantis said.
The banks are benefiting from a rise in consumer loans, lower costs and falling tax rates, Bantis said in an Aug. 16 research note. Profit growth will range from 12 percent at Bank of Nova Scotia, the No. 3 bank, to 3 percent at National Bank of Canada, the sixth-biggest lender, Bantis said. He said Royal Bank of Canada and Toronto-Dominion Bank, the two biggest banks, will likely raise their dividends.
