Morningstar | Strong Growth in the U.S. Propels BMO Forward in the First Quarter of 2019
Narrow-moat rated Bank of Montreal reported good fiscal first-quarter results. These results fit well within our long-term thesis on the company, and we do not plan any material changes to our fair value estimate of CAD 105 for Canadian shares (USD 79 for U.S. shares). The bank had strong EPS growth of 10% for the quarter, with earnings increasing to CAD 2.32 per share. BMO reported a 13.9% adjusted return on equity for the quarter, exactly in line with adjusted results from first-quarter 2018. The bank remains on track for continued operating leverage for the year, even as we see multiple growth headwinds developing over the medium term.Credit quality remained strong, with the provision for credit losses ratio staying range-bound in the mid- to upper-teens. Gross impaired loans were also relatively stable. Delinquency rates picked up slightly in the quarter for the Canadian real estate portfolio, going from 19 basis points in the fourth quarter to 21 basis points in the current quarter, although we note this was a very small move. Average Canadian mortgage balances were roughly flat year over year, fitting well within our expectations for a slowdown in growth.
On a segment level almost all of the growth came from the U.S. P&C segment. BMO has returned to exceptionally strong loan growth for this segment, with average loans up 11% year over year and average deposits up 16%. This, along with relatively stable net interest margins, led to growth in net interest income of over 30%. Management expects NIMs to expand more in 2019 than they did in 2018 for this segment.
Canadian P&C saw relatively flat adjusted net income, with revenue and expenses both increasing at roughly 3%, which seems reasonable to us given the growth headwinds we see in Canada. Capital markets saw good growth within Investment and Corporate Banking, however, the trading environment was difficult, leading to a net decline for adjusted net income. This is broadly in line with the results of peers. With the bank spending more on investments for future growth in this unit, we hope to see a stronger performance as those investments play out in the future. Wealth management saw assets under management increase 1%, along with lower transaction activity, which led to a decrease in adjusted net income in the quarter.
Bank of Montreal is a financial services organization. Co. provides a range of retail banking, wealth management and investment banking products and services. Co. serves its clients through three operating groups: Personal and Commercial Banking, which provides financial services to personal and commercial customers; Private Client Group, which provides wealth management products and services to individuals and select institutional segments; and BMO Capital Markets, which provides clients financial and capital markets services to corporate, institutional and government clients.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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