BMO raises dividend on higher net income, but misses estimates

The Bank of Montreal raised its dividend as its second-quarter profit rose thanks to its strengthening U.S. footprint, but fell short of market estimates due to severance costs in its capital market division.

Canada’s fourth-largest lender benefited from double-digit net income growth in the U.S. and strength at home and in wealth management, but BMO Capital Markets saw a drop in quarterly profits as it faced a large severance charge.

“We feel good about our performance … having earned through a severance cost with strong operating performance across our businesses,” BMO chief executive Darryl White told a conference call on Wednesday.

The Toronto-based lender hiked its quarterly payment to shareholders by three cents to $1.03 per share as it announced its latest earnings.

BMO said Wednesday its profit amounted to $1.497 billion for the quarter ended April 30, up 20% from a year prior. On an adjusted basis, however, its quarterly profit totalled $1.522 billion, up 4% from a year ago.

Its earnings totalled $2.26 per diluted share for its second quarter, up from $1.86 per diluted share a year ago. On an adjusted basis, BMO reported diluted cash earnings per share of $2.30 for the quarter, up 5% from $2.20 during the same period a year earlier.

Analysts on average had expected a profit of $2.33, according to those surveyed by Thomson Reuters Eikon.

BMO was the last of Canada’s Big Five lenders to report its second-quarter results in what has been a mixed showing for the sector.

The Canadian Imperial Bank of Commerce kicked off the latest round of earnings last week with a slight increase in its second-quarter profit, but fell short of estimates amid sluggish loan growth.

Royal Bank of Canada and Toronto-Dominion Bank, however, both delivered better-than-expected results. RBC benefited from strong loan growth and higher interest rates, while TD saw growth in its retail banking divisions on both sides of the border.

The Bank of Nova Scotia on Tuesday reported a slight rise in second-quarter profits on strong contributions from its international business, particularly in Latin America, but fell short of analyst estimates. The miss was driven by a surge in the lender’s provisions for loan losses in connection with several recent acquisitions, as required by accounting rules.

For BMO, the underlying fundamentals at its Canadian and U.S. personal and commercial banking divisions remained “solid” this quarter, with growth on both sides of the border, said Scott Chan, an analyst with Canaccord Genuity Corp.

The bank’s capital markets business faced a severance charge of $90-million post tax that, if excluded, would have resulted in BMO’s earnings per share exceeding Canaccord’s estimate, he added. The severance charge had a negative impact of roughly 14 cents per share.

“Outside of the severance charge, capital markets would have produced a strong showing, while wealth management rebounded from last quarter,” he said in a note to clients.

BMO’s total provisions for credit losses, or money set aside for bad loans, amounted to $176 million, up slightly from $160 million a year prior.

The lender’s U.S. personal and commercial banking division reported net income of $406 million, marking a $58 million or 17% increase compared with the prior year. The bank said the results were largely due to good revenue growth and lower provisions for credit losses, partially offset by higher expenses.

The bank’s domestic personal and commercial banking arm posted net income of $615 million, up $27 million or roughly 5% from the same period a year earlier. The division’s results reflected good revenue growth, which was partially offset by higher expenses and higher provisions for credit losses.

BMO Wealth Management reported second quarter net income of $305 million, up $9 million or 3% from the year prior.

BMO Capital Markets posted quarterly net income of $249 million, down nearly 13% from $286 million in the prior year. The bank said its strong performance in investment and corporate banking and higher trading products revenue were largely offset by severance expenses and higher provisions for credit losses.

The bank’s common equity tier one ratio, a key measure of a lender’s financial health, stood at 11.3% as of April 30. This is down from 11.4% in the previous quarter but flat from one year ago.

Overall, BMO’s second-quarter earnings are “notionally in line to modestly ahead,” said Robert Sedran, an analyst with CIBC Capital Markets in a note to clients.

White said Wednesday that the lender has “good momentum” across its businesses which it expects to drive performance for the remainder of the year.

For the first half of the 2019 financial year, the bank’s adjusted earnings per share is up 7%, and its U.S. segment contributed roughly 35% of adjusted earnings, he told a conference call.

“We believe we are on track to deliver that same level of growth in the second half of the year as well.”