Seeking Alpha
Profile| Send Message| ()  

Strong and clean results from Bank of Montreal (BMO) could prove to serve both its shares and the Canadian banking sector well during earnings season and beyond. That is because reasonably strong capital markets revenues – trading in particular – should be enjoyed by many other banks.

BMO’s earnings were well above expectations in the third quarter. But what is particularly compelling, according to Dundee Securities analyst John Aiken, is that the bank beat forecasts in both net interest income and provisions for credit losses. He told clients this could definitely bode well for future earnings.

Mr. Aiken said:

The big surprise in the quarter was specific provisions of C$357-million, well below expectations of above C$400-million by consensus. Overall, earnings quality has improved with lower reliance on securitization revenues (although trading revenues remain high) and a significant increase in net interest income).

Although absolute levels remain high, he noted that most credit balances flat-lined in the quarter – a definite positive. Mr. Aiken also noted that while it appears that U.S. balances have declined, retail credit and commercial real estate bear watching for some time.

Lower than anticipated specific provisions and widening margins can generally be assumed to be a positive for the other banks, the analyst said. Given BMO’s reported credit experience, he thinks we may have actually seen the peak in retail credit in the second quarter. Nonetheless, Mr. Aiken remains concerned about commercial and corporate lending in future quarters.

He said:

While we remain concerned about the absolute P/E valuations that BMO and the other banks are trading at, we would expect BMO’s positive results to lift its near term valuation, particularly as Internet rumours around a potential dividend cut likely impacted its valuation in the days leading up to the release.

The analyst added that BMO’s dividend remains quite safe, but with a core payout ratio of 70%, the bank will likely be the last bank to raise its dividend.

Mr. Aiken continues to rate BMO shares Sell with a C$35 price target.

Source: BMO: Strong Earnings Could Bode Well for Sector