The decline in net profit cannot hide its core momentum! Bank of Montreal (BMO.US)'s Q3 adjusted profit exceeded expectations and plans to launch a repurchase plan of up to 25 million shares

The Zhitong Finance App learned that the Bank of Montreal, Canada (BMO.US) handed over a report card of “surface setbacks and core improvements” in the latest fiscal quarter: net profit declined year-on-year due to one-time projects such as sales, transportation and supplier financing, but adjusted earnings per share and revenue exceeded market expectations, and profit before tax provision for various business segments set records. The bank also announced that it plans to launch a stock repurchase program of up to 25 million shares in the third quarter.

According to financial reports released by BMO, for the third fiscal quarter ending July 31, the bank achieved net profit of 1.75 billion Canadian dollars (about 1.26 billion US dollars), or 2.38 Canadian dollars per share; in comparison, net profit for the same period last year was 2.33 billion Canadian dollars, or 3.14 Canadian dollars per share. The main reason for the decline in net profit was a series of one-off projects, including $962 million in expenses from the sale of transportation and supplier financing businesses, and $10 million in expenses incurred by withdrawing from 138 branches in the US.

However, based on the adjusted caliber used by the bank to reflect underlying business performance, BMO's adjusted earnings per share for the third fiscal quarter were 3.96 Canadian dollars, higher than analysts' previous expectations of 3.77 Canadian dollars. BMO's total revenue for the quarter increased 10% year over year to 9.9 billion Canadian dollars, which also exceeded analysts' expectations of 9.73 billion Canadian dollars. Among them, net interest income increased slightly by 1.3% to $5.57 billion; non-interest income increased sharply by 24% to $4.33 billion.

Various business segments set records, and capital market and wealth management momentum continues

BMO CEO Darryl White (Darryl White) said that all of the bank's business divisions achieved record profits before tax provisions. In his earnings statement, he said that the capital market and wealth management business maintained continuous momentum, and commercial loans in Canada and the US continued to grow steadily.

By business, the BMO Bank of America segment's adjusted net profit was $925 million, higher than analysts' average estimate of $846 million; the capital market sector's adjusted net profit was 649 million Canadian dollars, which was also higher than the average estimate of 601 million Canadian dollars. Among them, global market revenue reached 1.34 billion Canadian dollars, an increase of 27% over the previous year, continuing the strong momentum of the North American banking industry in stock trading and other fields.

According to information, BMO's capital market business has always focused on stock trading. Bank of Canada analyst Gabriel Dechaine (Gabriel Dechaine) pointed out in a recent report that major US banks generally saw a sharp increase in stock trading revenue in the three months ending June, and BMO's layout in this area has benefited from it.

In terms of credit performance, BMO's total credit loss reserves for the third fiscal quarter were 722 million Canadian dollars, lower than the 739 million Canadian dollars in the previous quarter and 797 million Canadian dollars in the same period last year, and also lower than analysts' previous expectations of 780 million Canadian dollars. Credit provisions declined month-on-month and year-over-year, indicating that the bank's asset quality is stabilizing and the credit environment has improved. White attributed this to the bank's proactive risk management and diversified investment portfolio.

The BMO common equity Tier 1 capital ratio (CET1) was 13%, the same as the previous quarter, slightly lower than 13.5% in the same period last year, but still far above the 11% lower limit required by the Bank of Canada regulators for large banks.

BMO's return on equity (ROE) for the quarter narrowed to 8.4% from 11.6% in the same period last year due to goodwill impairment charges associated with the sale of transportation and supplier financing businesses. However, under the adjusted caliber, the bank's ROE increased to 14%, which is close to its target of reaching 15% in 2027.

At the same time as announcing the financial report, BMO said it plans to repurchase up to 25 million shares of common stock through a “Normal Course Issuer Bid (NCIB)” (Normal Course Issuer Bid (NCIB)). The bank plans to submit a relevant notice to the Toronto Stock Exchange and plans to launch this one-year repurchase program around September 8.

US business focus and strategic adjustments

According to our understanding, the US business is the core of BMO's strategic adjustments in recent years. The bank has consolidated all of its US businesses into a single unit, exited part of its low-profit loan portfolio, and sold a number of bank branches to focus resources in priority regions such as California. The adjusted net profit of the US banking sector for the third fiscal quarter exceeded expectations, indicating that these adjustments are gradually taking effect.

Jefferies analyst John Aiken (John Aiken) said in the report that the strong performance of BMO's US retail banking business was an “obvious positive factor,” which meant that the bank did not rely solely on wealth management and capital market operations to exceed expectations. He expects investors to respond positively to this report card.

Furthermore, BMO continued to advance its business layout during the season. The bank expanded its presence in Australia and strengthened its position in the metals and mining sector by acquiring the capital markets business of consulting firm Euroz Hartleys Group. Earlier this month, BMO and Royal Bank of Canada (RBC) agreed to sell Moneris, a joint venture payment platform between the two parties, to tech investment company Francisco Partners for 2 billion Canadian dollars. This series of actions shows BMO's strategic intention to optimize its asset portfolio and focus on areas of core strength.

Peer comparison: Scotiabank exceeded expectations in the same quarter

Scotiabank Canada (BNS.US), which released financial reports on the same day as BMO, also handed over a report card that exceeded expectations. Scotiabank's adjusted earnings per share for the third fiscal quarter were 2.28 Canadian dollars, higher than market expectations of 2.01 billion Canadian dollars; net profit attributable to shareholders was 2.91 billion Canadian dollars, which was also higher than analysts' expectations of 2.63 billion Canadian dollars.

Scott Thomson (Scott Thomson), CEO of Scotiabank, called it “a record quarter for the bank, with all business lines reporting strong results.” Its international business achieved revenue of 725 million Canadian dollars, exceeding the average forecast of 629 million Canadian dollars; capital market business revenue of 647 million Canadian dollars, far exceeding the average forecast of 514 million Canadian dollars, an increase of 37% over the previous year. Aiken called this an “unexpectedly strong” performance, but also cautioned: “Although we think the market will give a positive assessment of Scotiabank's performance, this 8% increase in expectations may not be fully reflected in its valuation.”

Scotiabank accrued credit loss reserves of 1.08 billion Canadian dollars for the third fiscal quarter, which fell short of market expectations of 1.13 billion Canadian dollars, which also showed that the credit environment was stabilizing. The bank is advancing the strategic transformation in the nearly three years since Thomson took office, cutting expenses, centralizing international operations, selling some Latin American assets, and increasing investment in the US market, including taking a stake in Cleveland's KeyCorp (KEY.US).

The financial reports of BMO and Scotiabank are a good start to the latest performance season for the six largest banks in Canada. Both banks have benefited from active capital market transactions, improved US and international operations, and reduced provision for credit losses. It is particularly noteworthy that the strong performance of the capital market business continues the trend of the previous quarter, reflecting that trading activity in the North American market is still active, and revenue growth in sectors such as stocks and fixed income is significant.

Judging from the stock price performance, Canada's top six banks have generally risen this year, but individual stock performance is divided. Due to the initial results of the restructuring of the US business, BMO's stock price performance is among the highest in the industry; although Scotiabank also rose with the sector, the increase lagged behind that of some of its peers. As the earnings season progresses, the market will be watching closely to see if other large Canadian banks can continue this trend beyond expectations.