Bank of Montreal set aside more money for potentially sour loans and severance costs as it absorbs Bank of the West during a difficult period for U.S. regional lenders. 

The Canadian bank earned $2.04 billion on an adjusted basis in the fiscal third quarter, weighed down by weaker results in its US personal and commercial division. That was equal to $2.78 per share, short of the $3.13 expected by analysts in a Bloomberg survey. 

Bank of Montreal closed the Bank of the West acquisition a little more than a month before Silicon Valley Bank collapsed in March, an event that sparked panic across the regional banking sector and left banks open to higher deposit costs and regulatory measures. Bank of Montreal’s net interest margin tumbled to 3.8 per cent in its U.S. P&C division in the third quarter, down from 3.96 per cent in the second quarter.

“The only good news here is that BMO’s U.S. margin pressure is certainly not the worst we have seen this quarter, and valuation already reflects a high degree of caution about the outlook for the U.S.,” Bank of Nova Scotia analyst Meny Grauman said in a note to investors. 

Bank of Montreal fell as much as 2.4 per cent before reversing to close up 0.3 per cent in Toronto as global equity markets rallied. The S&P/TSX Composite Commercial Banks index jumped more than 1 per cent.  

Canada’s third-largest bank by market value booked $492 million in provisions for credit losses, nearly 30 per cent more than analysts had projected. Much of the swing in loan losses was in the U.S. business.

But the bank’s top executives said they remain optimistic about Bank of the West, saying they’re on track to complete a complex conversion of its branches to the BMO brand over the Labor Day weekend, and that they may be able to beat their merger cost-cutting targets. 

Chief Executive Officer Darryl White said Bank of the West synergies and other measures should help the bank return in 2024 to positive operating leverage. That’s a measure of revenue growth relative to expense growth.  

“With the full integration of the Bank of the West ahead of us, the strength and the size and the stability of our balance sheet, and our superior risk and liquidity capital management, are built really to outperform in any environment,” White said during a conference call.

Severance, legal bills

The bank paid $162 million in severance costs during the quarter, which included layoffs at BMO Capital Markets in a response to slow deal flow. The bank cut about 2.5 per cent of its total staff, White told analysts. 

Legal issues were another drag on earnings, as the bank booked $83 million in legal provisions in capital markets — including a US$25 million penalty imposed by the Securities and Exchange Commission for employees using WhatsApp or other unauthorized channels to conduct business.

National Bank of Canada analyst Gabriel Dechaine said the results weren’t as far from analysts’ estimates as it appeared, if severance and litigation costs are excluded.

Overall net interest margin, or the difference between what a bank earns on loans and what it pays for funding, was 1.68 per cent, down 1 basis point from the second quarter, or 2 basis points on an adjusted basis. 

What Bloomberg Intelligence says

Bank of Montreal implies more aggressive cost cuts, we believe, in calling for accelerating efficiency initiatives, which could be more open following the Labour Day weekend Bank of the West conversion. The banks’s 3Q adjusted operating leverage was negative 12 per cent. As Canadian banking held up well in fiscal 3Q, US banking weakened due to interest margin pressure, while overall provisions for credit losses exceeded consensus. 

Bloomberg Intelligence analysts Paul Gulberg and Ethan Kaye