Bank of Montreal profit slumps as Bank of the West costs drag on fourth-quarter earnings

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Bank of Montreal BMO-T reported lower fourth-quarter profit that missed analysts’ estimates as the lender booked a surge in expenses as it folded in its takeover of California-based Bank of the West.

BMO earned $1.6-billion, or $2.06 per share, a 64 per cent decrease from the same quarter a year prior. in the three months that ended Oct. 31. Adjusted to exclude certain items, including costs related to BMO’s acquisition of Bank of the West and legal expenses, the bank reported profit of $2.81 per share – below the $2.86 per share analysts expected, according to Refinitiv.

The lender fully absorbed California-based Bank of the West in early September, converting its customers, products and services to BMO’s platforms. It booked acquisition and integration costs of $433-million in the quarter, up from $145-million a year prior.

While deal-related expenses dragged on the bank’s results, BMO also said that its estimates on cost synergies – which include savings from streamlining operations between the two combined companies – have increased to US $800-million from US$670-million by 2025 since it fully absorbed Bank of the West’s businesses in early September.

But BMO’s target of US$2-billion in pre-tax, pre-provision (PTPP) earnings by the first half of 2026 driven by the acquisition, “which takes some of the shine off of this updated expense number,” Scotiabank analyst Meny Grauman said in a note to clients.

“But we believe that it is still a net positive development as it makes achieving that PTPP number more certain even in a more challenging U.S. banking environment,” Mr. Grauman said. “We believe that pessimism about the U.S. banking market is they key barrier to a revaluation of this name, and so view this new guidance as helping to address that.”

Banks cut jobs, trim expenses as economic fears weigh on earnings

Chief financial officer Tayfun Tuzun said that rather than increase its broader earnings expectations, the lender factored in the state of the regional banking market in the U.S., which has deteriorated since BMO initially set the estimate at the outset of the deal.

“We could have said a little bit more than US$2 billion, but we didn’t necessarily want to get that precise,” Mr. Tuzun said in an interview. “The U.S. banking environment in 2023 was a bit more muted than we expected, so the starting point has weakened a little bit.”

Regional banks in the U.S. have been under pressure since the failure of Silicon Valley Bank and other lenders in March. Regulators have looks at ramping up capital requirements in the country that would prompt the banks to build larger cushions against economic downturns or financial stress.

Canada’s banking regulator mandates higher capital levels than its U.S. counterparts. BMO booked a common equity tier 1 (CET1) ratio of 12.5 per cent – well above the minimum requirement. But some analysts and investors have questioned whether the bank can continue to grow its market share in the U.S. given the tougher operating environment.

“There’s really no other way to say it, as we didn’t do this transaction to not take share. We’re good at it before and we’ll be even better at it afterwards,” BMO chief executive officer Darryl White said during a conference call with analysts. “And we’ve got the balance sheet to do it, because the competitors that we will be looking to take share from don’t have that capital ratio.”

BMO is the fifth major Canadian bank to report earnings for the fiscal fourth quarter. National Bank also reports earnings on Friday, posting higher profit that beat analyst expectations. Earlier this week, Bank of Nova Scotia and Toronto-Dominion Bank missed analyst expectations, while Royal Bank of Canada and Canadian Imperial Bank of Commerce beat estimates.

BMO’s share price climbed 1.1 per cent at 11 a.m. on Friday in Toronto.

In the quarter, BMO set aside $446-million in provisions for credit losses - the funds banks set aside to cover loans that may default. That was lower than analysts anticipated, and included $38-million against loans that are still being repaid, based on models that use economic forecasting to predict future losses. In the same quarter last year, BMO had a set aside of $226-million in provisions.

Total revenue fell in the quarter fell to $8.4-billion from $10.6-billion. Expenses climbed to $5.7-billion from $4.8-billion, which the bank said was driven by acquisition-related costs, including Bank of the West and Air Miles, as well as sales force and technology investments.

Since booking a severance charge in the third quarter, the bank’s work force fell 2.8 per cent as it trimmed more than 1,500 jobs, with more than half in the U.S. The cuts were made largely in back office, technology and operations roles, Mr. Tuzun said, adding that no cuts were made to the sales force at Bank of the West.

Profit from Canadian personal and commercial banking was $962-million, an increase of 5 per cent from a year earlier, as higher net interest income driven by larger balance growth and margins was partially offset by higher expenses and provision for credit losses.

Profit from the bank’s U.S. arm rose to $661-million, a slight increase of $1-million, bolstered by BMO’s integration of Bank of the West, which was partially offset by a decrease in underlying revenue due to lower net interest income, higher expenses and a higher provisions for credit losses.

The wealth management division generated $262-million, a decrease of 12 per cent as higher expenses offset the inclusion of Bank of the West and higher revenue from growth in client assets.

And capital markets profit rose 37 per cent to $489-million, driven by higher revenue in global markets and investment and corporate banking, partially offset by a rise in expenses and a higher provision for credit losses.