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BMO Reports Encouraging Q3

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Bank of Montreal (BMO - Free Report) reported its third-quarter 2012 adjusted earnings per share of C$1.49, which compares favorably with the previous-quarter earnings of C$1.44 and the prior-year quarter earnings of C$1.34. Adjusted net income came in at C$1.01 billion ($1.03 billion), up 3.1% from the prior quarter and 18.2% from the prior-year quarter.

The improvement in results came on the back of enhanced net interest revenue and non-interest income. The total assets and capital ratios also remained strong in the quarter. However, increased operating expenses were the primary headwinds.

On a GAAP basis, net income came in at C$970.0 million ($987.46 million), down 5.8% sequentially but up 37.0% year-over-year.

Behind the Headlines

Bank of Montreal reported adjusted revenue of C$3.68 billion ($3.74 billion) in the quarter, up 9.0% from prior-year quarter. Revenue, on an operating basis, came in at C$3.88 billion ($3.95 billion), up almost 16.8% from the prior-year quarter.

For the reported quarter, net interest income, on an operating basis, grew 10.7% year over year to C$2.01 billion ($2.04 billion). The improvement from the prior-year quarter was primarily due to the inclusion of results of acquired businesses. Adjusted net interest margin was 1.70% in the quarter, down 8 basis points from the prior-year quarter.

Non-interest revenue came in at C$1.67 billion ($1.70 billion), up by 6.6% from the prior-year quarter. The year-over-year increase was the result of higher deposit and payment service charges, trading revenues, lending fees, card fees, investment management fees, securities gain and other income, partly offset by reduced securities commissions and fees, mutual fund revenues, underwriting and advisory fees, foreign and insurance income.
On an operating basis, non-interest expenses were C$2.34 billion ($2.38 billion), surging 13.2% from the prior-year quarter. The hike was due to inclusion of results of the acquired businesses and the relatively strong American dollar.

Asset Quality

Total provision for credit losses were C$116.0 million ($118.09 million) as of July 31, 2012, down 23.2% from the prior quarter and 52.6% from the comparable quarter last year. Moreover, adjusted provision for taxes stood at C$206.0 million, ($209.71 million) down 13.1% from the prior quarter and 1.9 % from the year-ago quarter.

Balance Sheet

Total assets came in at C$542.2 billion ($551.96 billion) as of July 31, 2012, jumping 8.3% as of October 31, 2011. The enhancement primarily reflects increases in net loans and acceptances, cash and cash equivalents, interest bearing deposits with banks along with securities and securities borrowed or purchased under resale agreements, partly offset by decline in other assets.

Capital and Profitability Ratios

Bank of Montreal’s capital ratios remained strong in the reported quarter. As of July 31, 2012, Tier 1 capital ratio (Basel II) was 12.4%, up from 11.97% as of April 30, 2012, and 11.48% as of July 31, 2011. However, total capital ratio (Basel II) stood at 14.78% as of July 31, 2012 from 14.89% as of April 30, 2012, and 14.21% as of July 31, 2011.

For the reported quarter, common equity (Basel II) improved to 10.31% from 9.9% in the prior quarter and 9.11% in the prior-year quarter.


Concurrent with the earnings release, Bank of Montreal declared fourth-quarter dividend of 72 cents per share payable on November 28, 2012 to shareholders of record as of November 1, 2012. This represents a 2.8% hike from the third quarter dividend.

Our Viewpoint

We anticipate Bank of Montreal’s acquisition activities to positively impact its financials in the long run. Further, investors’ confidence is expected to be boosted since the company has announced a dividend hike. However, low interest rate environment, weak economic recovery and increased regulatory requirements will remain a drag on its financials.

Bank of Montreal currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. One of its peers, Westpac Banking Corporation (WBK - Free Report) retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating.

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