29 August 2017

Why BMO Shares Got Whacked Today Despite an Earnings Beat

The Globe and Mail, 29 August 2017

Bank of Montreal was down more than 2 per cent at midday as investors reacted negatively to the company's fiscal third-quarter earnings report.

While BMO's adjusted earnings of $2.03 a share beat the $2.01 average estimate of 14 analysts surveyed by Bloomberg, some analysts and fund managers expressed disappointment with the company's U.S. banking results.

Earnings from its U.S. operations, including Chicago-based lender BMO Harris Bank, were flat from a year earlier at $278-million, the company said.

"U.S. banking results were disappointing," said Steve Belisle, a portfolio manager with Manulife Asset Management in Montreal.

"They're facing a slowdown in commercial and industrial lending in the Midwest and a runoff of its indirect auto book."

Slowing growth in the U.S. is a particular concern for investors, as BMO's exposure to the country is among the biggest of Canada's major banks.

"Given that investors overweight on BMO shares are likely positioned as such due to its above-average exposure to U.S. banking, we expect any relative upside will be muted given the weaker loan trends," said Eight Capital analyst Steve Theriault.

The U.S. banking business had a 1 percent improvement in loan balances from the second quarter, though that total was down 1.3 per cent from a year earlier when measured in U.S. dollars, according to a financial statement. Deposits were little changed from the second quarter and fell 2.6 per cent from a year earlier adjusted for currency.

Chief Financial Officer Tom Flynn said in an interview with Bloomberg News today that expectations were high following the U.S. election. "And it looks like, given some uncertainty about the timing of the implementation of some of the policies of the new administration, there's been what feels like a spreading out of some investment decisions by companies."

That's had "a moderating impact" on U.S. bank loan growth, Flynn said, adding that he expects business to pick up on improved customer confidence and expectations of 2 percent U.S. economic growth through next year.

Canadian banking stocks have stagnated since the start of the year on concerns that previously red-hot housing markets in Toronto and Vancouver could see sharp declines and expose lenders to losses on loans.

Despite those worries, four of the country's biggest five banks in recent days have reported third-quarter profits that topped expectations. Bank of Nova Scotia also reported its latest results this morning, posting adjusted earnings of $1.68, above the concensus call of $1.64.

Shares in BMO had been down more than 3.3 per cent this morning.