BMO misses expectations on higher credit loss provisions

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Bank of Montreal‘s fourth-quarter earnings fell short of analyst expectations as it was forced to set aside significantly more money than expected to cover potential bad loans, a credit deterioration the bank’s chief risk officer says has reached a “high point.”

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BMO’s total provisions for credit losses (PCL) — the amount of money banks keep aside to tackle potentially bad loans — increased to $1.5 billion, up from $446 million a year ago and much higher than analysts’ expectation of about $1.04 billion.

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The lender’s results in general this year have been impacted by elevated provisions for credit losses. For example, BMO’s PCL in the previous quarter jumped to $906 million from $492 million in the same period a year ago.

But chief risk officer Piyush Agarwal expects 2025 to be better.

“While we expect provisions to remain elevated, we believe that Q4 represents a high point and will begin to moderate through 2025,” he said on a conference call on Thursday.

Agarwal said the impact of the PCLs led to “a lot of learning,” and that the bank now has an “improved process” with regards to client selection or due diligence.

“We’ve talked about the interest rates and how that was an impact to probably many clients,” he said. “But really, in hindsight … I think there were some segments of clients that we onboarded in that vintage, around (2021) … that did not play to our advantage, that were the cause of the big losses in ’24.”

For 2025, BMO has a “strong foundation and significant balance sheet capacity for growth,” chief executive Darryl White said in a statement. “We are confident in the execution of our strategy to drive profitable growth and enhanced return on equity over the medium term.”

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BMO’s net income for the three-month period ending Oct. 31 was $2.3 billion, which was higher than the $1.7 billion earned during the same period last year and resulted in net earnings per share of $2.94.

However, adjusted for certain conditions, the bank earned $1.5 billion on an adjusted basis compared to $2.2 billion a year ago. This resulted in adjusted earnings per share of $1.90. Analysts had expected BMO to earn $2.38 per share, according to a Bloomberg survey.

John Aiken, an analyst at Jefferies Inc., said PCL was 50 per cent more than forecasted, but BMO seems to be clearing the decks.

“BMO appears to be trying to put its credit issues behind it, with even higher provisions on performing coincident with a spike in reserves against performing loans to buttress against future deterioration,” he said in a note on Thursday. “While this will likely be viewed positively by investors, the degree of relief will be contingent on management’s commentary along with the level of conviction that the market has that credit has peaked.”

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BMO also announced it has increased its quarterly dividend by four cents to $1.59 per share.

Meny Grauman, an analyst at Bank of Nova Scotia, said in a note that there was “no way to sugarcoat a 20 per cent miss” in earnings. But he highlighted the bank’s in-line pre-tax earnings and strong capital position that led to the dividend increase and a new round of share buybacks. The key focus of investors, however, will remain on BMO’s credit situation, he said.

• Email: nkarim@postmedia.com

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