Nivedita Balu and Arasu Kannagi Basil
(Reuters) – Canadian lender Bank of Montreal missed analysts’ estimates for quarterly profit on Wednesday due to weakness in its U.S. segment and as it sets aside more funds to cover potentially bad loans in a high-interest rate environment.
The US segment, which generates about a third of BMO’s total revenue, has been a key market for the lender as it spent $16.3 billion last year to acquire regional lender Bank of the West, which helped expand its network by adding 1.8 million customers and 500 branches on the West Coast.
The move comes as Canadian banks look to diversify south of the border, looking for alternative routes to growth as competition intensifies in a saturated, heavily regulated domestic market.
BMO said its U.S. segment’s adjusted net income fell 24% due to lower net interest income, or the difference between what the bank earns on loans and pays out on deposits due to lower margins.
Lenders are competing on deposit rates to discourage consumers from moving their money into alternative high-yield funds amid high interest rates.
Highlights in the quarter included the bank’s Canadian division, which saw earnings rise 7% on an adjusted basis, and its capital markets segment, which reported a 23% rise in net income, driven by higher interest rates and strong debt and equity issuance. .
In recent quarters, lenders have had to set aside more funds to cover loan losses. High interest rates are putting pressure on consumers paying off mortgages and auto loans as they also cope with the increased cost of living.
Overall, provisions for credit losses totaled C$705 million ($515.80 million) in the second quarter, compared with analysts’ estimates of C$563.3 million, according to LSEG.
NII for BMO fell 6% to C$4.52 billion.
“Tough quarter for BMO,” said KBW analyst Mike Rizvanovich, noting that credit losses were underreported and disappointing U.S. results overshadowed an otherwise “nearly normal quarter.”
Meanwhile, smaller peer National Bank of Canada (OTC:) beat analysts’ estimates for quarterly profit, thanks in large part to its capital markets and asset management business.
National Bank earned C$2.54 per share, beating the average estimate of C$2.45.
BMO’s adjusted net income fell to C$2.03 billion in the three months ended April 30 from C$2.19 billion. On a per-share basis, BMO earned C$2.59 per share, compared to estimates of C$2.77.
($1 = 1.3668 Canadian dollars)