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Fall in capital markets profit drags on BMO earnings


The Bank of Montreal posted lower adjusted earnings for the fourth quarter of 2022 as capital markets revenue fell and increased loan-loss provisions offset gains from rising revenue.

The bank’s adjusted earnings were $2.14 billion or $3.04 per share in the three months ending Oct. 31., down from $2.22 billion or $3.33 per share a year ago. On average, analysts had been expecting $3.09 per share. BMO also boosted its quarterly dividend by four cents to $1.43 per share.

On an unadjusted basis, the bank posted a profit of $4.48 billion, more than double the $2.16 billion a year ago, but those gains included a significant contribution from fair value management measures tied to BMO’s acquisition of Bank of the West.

For the full fiscal 2022 year, BMO reported net income of $13.54 billion. Adjusted net income for the year was $9.04 billion, up from $8.65 billion.

“This year, we continue to execute on our strategy to strengthen and grow each of our diversified businesses to deliver sustained performance,” said BMO Financial Group president and chief executive officer Darryl White during a Thursday morning conference call. “Of note, including 2022, we’ve achieved consistent pre-provision, pre-tax earnings growth and met our commitment to positive operating leverage in each of the last five years.”

White said the macro environment remained uncertain and that the economy was still facing headwinds from inflation and higher interest rates, with the bank expecting the latter to peak by the end of the first quarter of next year.

White added that the bank would continue to focus on its North American growth strategy by finalizing the close of the US$16.3 billion Bank of the West deal announced in December 2021.

The bank has been managing its deal-related exposure to rising interest rates — which can reduce the fair value of Bank of the West’s rate-sensitive assets and lead to higher goodwill and additional capital requirements — through a variety of swaps and instruments. Those measures resulted in more than $3.3 billion in after-tax revenue this quarter, skewing reported results.

BMO does not expect the gains to reverse, but plans to use them to cover any extra capital requirements when the Bank of the West deal closes.

The bank also recorded a pre-tax legal provision of $1.14 billion in a Nov. 9 Ponzi scheme lawsuit related to the Marshall and Illsley Bank, which merged with BMO Harris Bank N.A. in 2011. At the time, BMO said it planned to appeal the decision to reverse the verdict or reduce damages.

BMO’s Canadian personal and commercial banking segment reported profit of $917 million, down two per cent from last year. Revenue in its Canadian banking segment climbed 11 per cent on higher net interest income. Net income from its U.S. banking business rose 30 per cent from the previous year to $660 million as the U.S. dollar strengthened and revenues rose.

Factors that weighed on the results included increased provisions for credit losses, or the amount of money the bank sets aside for bad loans, which rose to $226 million in the fourth quarter compared to a loan-loss recovery of $126 million the year before.

BMO’s capital market segment also saw profit fall 33 per cent to $357 million as trading revenue from equities declined.

John Aiken, senior analyst and head of research at Barclays Bank PLC, said despite the miss, he was impressed by BMO’s loan growth and the profit in the bank’s U.S. platform.

“The contraction in domestic retail margins are disappointing but the strong growth in loan volumes on both sides of the border are encouraging,” Aiken wrote in a Dec. 1 note to clients.

Shares of BMO closed up one per cent at $133 in Toronto Thursday.

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