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Morningstar | BMO Reports Decent 4Q Results; We Expect Growth to Slow Over the Medium Term

Narrow-moat-rated Bank of Montreal reported decent fiscal fourth-quarter results that do not alter our long-term thesis on the company. The bank outperformed our expectations on the credit provisioning front, but had higher taxes than we expected, along with slightly higher shares outstanding leading to a final full-year EPS a bit lower than our projections. None of these differences were material, but after re-evaluating our longer-term outlook and lowering growth assumptions over the next five years, we are decreasing our fair value estimates to CAD 105 from CAD 107 and to $79 from $83 for the U.S. shares.

BMO reported a 14.6% return on equity for full-year results, on the lower end of the major Canadian banks. Legal provisioning and higher reinsurance charges hurt wealth- and insurance-related income for quarterly results, however growth was still decent within Canadian property and casualty and U.S. P&C. The Canadian business saw net income up 8% for the quarter, largely due to declining credit provisioning. This is a trend that probably won't persist, and without this, revenue and expenses were both up 4% each. Even so, average loans were up 4% for the unit, and HELOCs and mortgages were up only 3%, a reasonable growth number in our view. U.S. P&C saw continued outsize growth, with average loans up 11% and revenue up 8%. However, the bank is competing aggressively on loan and deposit spreads, which has helped net interest margins actually decline for the unit, the reverse of what we are seeing for most of our U.S. bank coverage. Capital markets revenue was up only 1% in the quarter, as trading products revenue has been under pressure, and the bank has been spending more on investments for future growth. We hope to see a stronger performance from this segment as those investments play out in the future.

Credit quality remained strong, with the provision for credit losses ratio remaining range-bound in the upper teens, gross impaired loans decreased yet again during the quarter, and delinquencies were generally steady within the consumer portfolio. This stability was also present for the Canadian residential mortgage portfolio. The bank gave updated guidance around oil-related exposures, and as is the case for the rest of the banks, WCS-related exposures make up less than 0.5% of total loans.