Tuesday morning, Canada-based BMO Financial Group (BMO,BMO.TO) reported a 21% decline in its profit for the third quarter on a more than five-fold increase in its provisions for credit losses due to continued deterioration in U.S. housing markets. The company's adjusted cash earnings per share for the quarter declined more than 28% and missed analysts' consensus estimate. However, revenues for the latest quarter increased 7.5%. For fiscal year 2008, the company said it does not expect to achieve most of its annual targets due to the challenging economic environment.
In addition, the company announced its intention to renew its normal course issuer bid through the facilities of the Toronto Stock Exchange, subject to regulatory approval. The company also declared a quarterly dividend for the fourth quarter that is unchanged from the previous quarter and from a year ago.
Third Quarter Results
The company's net income for the third quarter declined to C$521 million, or C$0.98 per share, from C$660 million, or C$1.28 per share, in the prior-year quarter. Cash net income fell to C$530 million, or C$1.00 per share, from C$670 million, or C$1.30 per share, in the same period last year.
Excluding certain items, net income for the latest quarter declined to C$551 million, or C$1.04 per share, from C$757 million, or C$1.47 per share, in the year-ago quarter. Cash earnings per share declined to C$1.06 from C$1.49 a year ago.
Analysts polled by First Call/Thomson Financial expected the company to report earnings of US$1.14 a share, down from last year's US$1.36.
Total revenue for the quarter increased 7.5% to C$2.75 billion from C$2.56 billion in the previous-year quarter.
Net interest income increased 3% from a year ago to C$1.29 billion, while non-interest revenue climbed 12% from the same period last year to C$1.46 billion.
The provision for credit losses for the third quarter totaled C$484 million, up from C$91 million in the year-ago period. The provision for the latest quarter consists of C$434 million of specific provisions and a C$50 million increase in the general allowance. The specific provisions were elevated due to the inclusion of $247 million for two corporate accounts related to the U.S. housing market that were identified as impaired in the first half of the current year.
Commenting on the results, Bill Downe, President and Chief Executive Officer, BMO Financial Group said, "The impact of the deterioration in the U.S. housing market has affected our results and while uncertainty exists, we are confident in the earnings capacity of the core franchise." The company's Tier 1 Capital ratio for the quarter was 9.90%, while Total Capital Ratio was 12.29%. Return on equity for the quarter declined to 13.5% from 18% a year earlier.
Segmental Results
P&C Canada's net income for the quarter was C$343 million, down 3.2% from a year ago. The year-ago results include a $14 million recovery of prior period income taxes.
Revenue for the quarter increased 3.0%, on strong volume growth and improved revenues in personal banking and cards and payment services, with a small decline inn commercial banking due to higher recoveries of interest on loans a year ago. Net interest margin decreased from a year ago.
P&C U.S. reported a 12% increase in net income from the same period last year to US$28 million. Revenue for the quarter climbed 16% with the acquisitions of Wisconsin-based Merchants and Manufacturers Bancorporation Inc. and Ozaukee Bank contributing a little more than half of the growth, and the balance attributable to core revenue improvements. The company incurred US$3 million of acquisition integration costs in the latest quarter and anticipates integration costs to increase to about US$16 million-US$18 million in the fourth quarter on completion of the bulk of the integration.
Private Client Group's net income for the quarter climbed 8.4% to C$110 million despite a difficult market environment. Revenue for the quarter grew 4.8%, or 5.6% excluding the impact of the weaker U.S. dollar. The company recorded growth in a number of its businesses with increased fee-based revenue in Full-Service Investing and higher trust and investment revenue in North American Private Banking. There were higher deposit balances in brokerage businesses as well as higher loan and deposit balances in North American Private Banking. Assets under management and administration and term deposits of $286 billion were affected by softer market conditions, but increased 1.5%, excluding the impact of foreign exchange.
BMO Capital Markets reported a 34% surge in net income from a year ago to $259 million due to significantly higher trading revenues and strong performance from the company's interest-rate-sensitive businesses. Revenue for the quarter grew 7.9% to $746 million, due in part to strong performance from the company's interest-rate-sensitive businesses.
Year-To-Date Results
For the nine months, the company's net income declined to C$1.42 billion, or C$2.70 per share, from C$1.68 billion, or C$3.24 per share a year ago. Cash earnings per share for the period declined to C$2.75 from C$3.29 in the same period last year.
Excluding items, earnings per share declined to C$3.48 from C$4.24 a year ago, while cash earnings per share for the period declined to C$3.53 from C$4.29 in the previous-year period.
Revenue for the nine-month period increased to C$7.39 billion from C$7.15 billion in the same period of the previous year.
Other Developments
The company said that it intends to file a notice of intention with the Toronto Stock Exchange to make a new normal course issuer bid, subject to regulatory approval and the approval of the exchange. The normal course issuer bid provides that the company may purchase up to 15 million common shares, being approximately 3% of the public float, between September 8, 2008 and September 7, 2009. The company said that its share repurchase program is primarily used to offset the impact of dilution caused by issuing shares through the exercise of stock options, its dividend reinvestment plan and convertible shares.
BMO said that its previous 12-month normal course issuer bid expires on September 5, 2008 and added that it has not repurchased any common shares under that bid. There were 504.45 million Bank of Montreal common shares issued and outstanding as at July 31, 2008 and the public float was 504.27 million common shares.
BMO's board of directors declared a quarterly dividend payable to common shareholders of C$0.70 per share, unchanged from a year ago and from the preceding quarter. The dividend is payable November 27, 2008 to shareholders of record on October 31, 2008.
Outlook
Looking ahead, the company said it currently does not expect to achieve most of its fiscal year 2008 targets previously provided, due to challenging economic environment. These include its forecast of a 10% to 15% growth in earnings per share for the year from a base of C$5.24, returns on equity of 18% to 20%, Tier 1 Capital Ratio of at least 8.0% on a Basel II basis and cash operating leverage of at least 2.0%.
Stock Quotes
In Tuesday's regular trading session on the NYSE, BMO is trading at US$41.46, down US$0.49 or 1.17% on a volume of 0.22 million shares. The stock has been trading in a range of US$37.70-US$67.70 in the past 52 weeks.
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