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Bank of Montreal profit climbs 7%, National Bank hit by Maple writedown

Bank of Montreal (BMO.TO) and National Bank of Canada (NA.TO) kicked off the fiscal first-quarter reporting season for the big banks, with a mix of good and not-so-good news that will likely set the tone for the rest of the reporting season, if not the entire year.

The good news: BMO’s profit rose 7 per cent over last year, to nearly $1.1-billion, no doubt providing some relief to anyone who felt that the depressed energy sector, low interest rates and weak Canadian economy were going to exert some influence during the quarter.

And if you look the other way on National Bank’s $165-million writedown on its investment in Maple Financial Group during the quarter, its adjusted profit rose 4 per cent, to $427-million, ahead of analysts’ estimates.

But the not-so-good news suggests that the headwinds everyone is talking about – and the stock market is reacting to – have hardly subsided: In their results, both banks showed that the domestic market is challenging.

Take BMO. Among the standouts during the quarter, its U.S. personal and commercial banking division saw profit rise 31 per cent over last year, and a still-impressive 13 per cent if you ignore the benefits of a stronger U.S. dollar; and profit from its capital markets division rose 18 per cent, also helped by the U.S. dollar. Both figures reflect the virtues of geographical diversification.

But closer to home, the situation is less encouraging. Profit at BMO’s Canadian personal and commercial banking division rose just 5 per cent over last year, profit from wealth management fell slightly and the bank’s total provision for credit losses – a much watched figure reflecting the deteriorating health of corporate borrowers in the energy sector – rose to $183-million, up $20-million.

National Bank, which is far more domestically-focused than BMO, looked a little better but nonetheless reflected a weak environment. Its Canadian personal and commercial banking division reported an 8 per cent increase in profit over last year. Wealth management rose 4 per cent and financial markets rose 5 per cent (again, excluding the writedown in Maple Financial Group).

More troubling, net interest margins – or the difference between what a bank makes from lending money and what it pays in borrowing costs – subsided to 2.22 per cent, down from 2.24 per cent last quarter. And National Bank’s provision for credit losses rose to $63-million, up nearly 17 per cent from last year.

Add it up, and what you get are bank results that continue to outperform the underlying domestic economy, which is struggling to maintain any growth at all; and while provision for credit losses are moving higher, they are by no means flashing signs warning of big losses ahead. Again, this is the good news.

But the first quarter results nonetheless tap into the theme of lackluster domestic performance that observers have been exploring – and the stock market has been reflecting, with bank share prices slipping into a bear market earlier this year, down more than 20 per cent from their highs.

Analysts, already cautious heading into the reporting season, didn’t change their outlook on Tuesday following the quarterly results from BMO and National Bank.

Darko Mihelic, an analyst at RBC Dominion Securities, had this to say in a note about BMO’s better-than-expected profit: “We are neutral because the beat was largely related to capital markets business (which may not necessarily be viewed as sustainable) and although credit was benign, we continue to believe higher PCLs are just around the corner.”

Meny Grauman, an analyst at Cormark Securites (who has a “buy” recommendation on National Bank), also noted that the future still looks murky: “The problem is that with oil prices still in the doldrums and a fresh round of borrowing base reviews looming, the outlook remains very challenging. This should limit positive market reaction to results that on the face of it beat expectations.”

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