Bank of Montreal (TSX:BMO) dipped about 3.8% after reporting its fiscal second-quarter (Q2) earnings results. This is a pretty big dip in a day for a big Canadian bank stock. Some of the focus in the news headlines are along the lines of “shares slump after missing earnings,” “slower growth,” and “credit provisions pressuring earnings.”
Let’s put those headlines into perspective.
BMO missed earnings estimates
For the quarter, the analyst consensus forecast BMO’s earnings per share (EPS) to be $3.23, which would be flat from the diluted EPS a year ago. However, BMO reported diluted EPS of $2.93, which is 9.3% lower.
Estimates are estimates. When actual earnings beat or miss the estimate, it just gives reason for the underlying stock to be more volatile. If you believe in the long-term earnings power of Bank of Montreal, dips like this is an opportunity to buy more shares.
If a roughly 3.8% dip doesn’t seem like a lot, you might be interested to know that coincidentally, the BMO stock hit a new 52-week low due to this price pressure. For reference, the bank stock has declined roughly 13% over the last 12 months and is more than 18% below its 52-week high.
Slower growth and pressured earnings
Economic boom and bust directly affect bank earnings. As economists have predicted for some time now, Canada and the United States — geographies that Bank of Montreal operates in– are expected to have a recession (probably a mild one) this year.
Like its peers, Bank of Montreal is setting aside higher provision for credit losses (PCL) to prepare for a higher percentage of bad loans during a recession. For the quarter, the PCL jumped to $1,023 million from $50 million a year ago, resulting in a return on equity (ROE) of 5.6%.
BMO noted that the reported income for the quarter, “included an initial PCL of $517 million ($705 million pre-tax) on the purchased Bank of the West performing loan portfolio, acquisition and integration costs of $549 million ($727 million pre-tax) and amortization of intangible assets of $85 million ($115 million pre-tax).”
On an adjusted basis, PCL jumped to $318 million versus $50 million in fiscal Q2 2022. The adjusted ROE was 12.6%. The higher PCL led to net income falling 78% to $1,059 million, but adjusted net income rose 1.3% to $2,216 million. On a per-share basis, earnings fell 82% to $1.30, while adjusted earnings fell 9.3% to $2.93.
The Bank of the West acquisition may have added weight on BMO’s results in the near term. However, in the future, when the U.S. economy improves, a release of PCL would boost earnings. Darryl White, the BMO chief executive officer, stated in the press release, “Against the backdrop of an uncertain economic environment, our Canadian and U.S. personal and commercial banking businesses continued to deliver good pre-provision, pre-tax earnings, while our wealth and capital markets businesses were impacted by lower customer activity.”
Notably, Bank of Montreal’s long-term prospects remain intact. The bank increased its dividend right on schedule semi-annually by 2.8%, which is also a year-over-year increase of 5.8%. At $112.91 per share at writing, the dividend stock offers a nice dividend yield of 5.2%. Valuation expansion and a reversion to earnings growth can potentially drive total returns of approximately 13% per year over the next five years.
Investors should understand that as this recession plays out, the stock could continue to be pressured. That said, it provides a good opportunity for investors to accumulate on weakness for long-term investment in the solid bank that’s awarded an S&P credit rating of A+.