The cake has been devoured, the drinks consumed and now all that’s left to look forward to is the clean-up and maybe the hangover — that pretty much sums up the the feel of the latest bank results.
Bank of Montreal Wednesday reported a profit for the second quarter of $975-million, down 5% from the same period last year on slimmer net interest margins and higher expenses offset higher loan volumes.
BMO is the fourth big lender to post results for the quarter, coming on the heels of Bank of Nova Scotia, National Bank of Canada and Toronto-Dominion Bank, all of which fell slightly below analyst expectations largely as a result of a cooling now under way in domestic real estate lending.
For the past several years players have been gorging on soaring domestic consumer lending, especially mortgages as Canadians jumped en masse into the housing market, pushing up prices across the country. But personal debt soared as well — it’s sitting at record levels and that’s left borrowers vulnerable.
Now government efforts to tighten rules around mortgage lending combined with a slowing economy are seriously curtailing demand. Long story short, the party appears to be drawing to a close.
Earlier this year, BMO, Canada’s fourth-biggest bank by assets drew media attention with super-low mortgage offers (at one point drawing a reprimand from Finance Minister Jim Flaherty). Yet second-quarter revenues from domestic retail lending stayed put, with zero growth compared to last year as net interest margins, or the difference between the bank’s cost of funding and the rate it charged its customers, got squeezed. Blame it on tougher competition among lenders and declining consumer demand.
Profit at the domestic retail operation came in at $430-million, down from $433-million. That amounts to a drop of less than 1% but in a business where markets have come to expect growth in the high single digits, any decline is big deal. Keep in mind that for most of the past decade, consumer lending in Canada has been the biggest single profit driver for all the banks.
So far this quarter, the slowdown is most apparent in BMO’s results but the same trend is clearly hitting its peers, with domestic retail loan growth topping out in the mid single digits at Bank of Nova Scotia, excluding acquisitions.
The picture is somewhat brighter at BMO’s U.S. operation, which reported a profit of $152-million, up 6% from last year partly due to lower provisions for credit losses. It’s been a hard slog in the U.S., not just for BMO but also for TD, as they’ve had to contend not only with the aftermath of the real estate meltdown but also with the plethora of new financial industry regulations that continue to be put in place by policy makers.
The good news is that the U.S. economy is starting to turn around. The Canadian banks are betting a rising tide south of the border will vindicate all the efforts they’ve gone to over the past decade, and that the coming profits will offset potential losses that might result if the real estate lending party in Canada comes to a too-abrupt ending.
“Looking forward, we have an advantaged business mix and are well-positioned for the current environment given our footprint in an improving U.S. Midwest economy, combined with our strength in commercial banking, capital markets and wealth,” BMO chief executive Bill Downe said in a statement. “These are important differentiators. At the same time, we continue to focus on what’s necessary to support future growth, and are confident that the value we create for customers will translate into financial performance for the bank.” John Greenwood, Financial Post