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BMO quarterly earnings
Photo Illustration by Igor Golovniov/SOPA Images/LightRocket via Getty Images

BMO reports increased delinquencies, predicts prolonged high interest rates

BMO reported a rise in delinquencies in the second quarter and said it expects credit challenges to persist with interest rates now likely to remain higher for longer.

The bank saw 90+ day delinquencies in its real-estate secured lending (RESL) portfolio rise to 0.19% in the quarter, up from 0.17% last quarter and 0.14% of its portfolio a year ago.

Despite the rise in late payments in the bank’s RESL portfolio, it says actual losses have been concentrated in unsecured lending, such as consumer loans, credit cards and business and government loans.

“The credit themes we’ve been seeing over the last several quarters continue to play out as the higher level of interest rates and slowing economic activity are reflected in credit migration and higher impaired loss rates,” Chief Risk Officer Piyush Agrawal said during the bank’s second-quarter earnings call.

The bank disclosed it set aside $705 million in loan loss provisions in the quarter, which are funds banks must keep on hand to cover potential future losses. That’s up from $627 million in the previous quarter.

Losses are expected to mount across various lending portfolios in the coming quarters as clients struggle with payments as interest rates remain at elevated levels. Like other banks, BMO also adjusted its rate-cut forecasts for both the Bank of Canada and the U.S. Federal Reserve.

“We now expect somewhat fewer and delayed rate cuts this year in both Canada and U.S., with the Bank of Canada expected to begin lowering rates this summer and the Fed in the fall at a moderate pace,” said President and CEO Darryl White.

“Credit risk, while elevated from last quarter, is well managed in what continues to be a challenging environment for many of our customers, where some individuals and businesses are being impacted by prolonged higher interest rates and a slowing economy,” he added.

42% of BMO’s variable-rate mortgages still in negative amortization

BMO also disclosed details about its mortgage portfolio and the status of its fixed-payment variable-rate mortgage clients.

As of Q2, BMO still has $19.9 billion worth of mortgages in negative amortization, representing about 42% of its total variable-rate mortgage portfolio. This is down from a peak of 62% of its variable-rate mortgages in negative amortization.

  • What is negative amortization? Negative amortization impacts borrowers with fixed-payment variable-rate mortgages in an environment when prime rate rises significantly, resulting in the borrower’s monthly payment not covering the full interest amount. This causes the mortgage to grow rather than shrink.

“Our outreach to customers continues to be successful with many taking actions, resulting in a significant reduction in mortgages that are in negative amortization,” Agrawal said last quarter.

The bank also provided updated figures on the number of renewals it anticipates in the coming years.

While the bank expects just 14%, or $20.5 billion, of its mortgage balances to renew in the next 12 months, more than 70% of its mortgages are up for renewal after fiscal 2025.

For those that have already renewed their mortgage, BMO said clients have experienced an average increase to their regular payment of 22% for variable mortgages and 19% for fixed mortgages.

However, BMO says it’s proactive outreach to customers continues to yield positive results in helping them to address credit issues before they lead to losses on the bank’s balance sheet.

“We’ve been very successful in proactive contact to customers, getting in front of the situation for them and helping them navigate, whether that be mortgages or credit cards or any unsecured lending,” said Ernie Johannson, Head of BMO North American Personal and Business Banking.

“And what we are finding is the receptivity has been very strong and the performance of those contacts have been very helpful to the customers and ultimately in us being able to navigate and reduce losses,” he added. “Efforts are good and they will continue over the course of the next probably a year as we go forward.”

2 The average payment increase reflects an assumed interest rate of 5.75% at renewal and includes regular payments and additional pre payments made to date

BMO has also continued to see the share of its mortgages with a remaining amortization above 30 years continue to decline each quarter, reaching 23.6% as of Q2, down from nearly a third a year ago.

Remaining amortizations for BMO residential mortgages

Q2 2023Q1 2024Q2 2024
16-20 years13.5%13.9%14.1%
21-25 years31.8%32.4%32.2%
26-30 years14.3%19.3%20.4%
30 years and more31%24.7%23.6%
Remaining amortization is based on current balance, interest rate, customer payment amount and payment frequency.

BMO earnings highlights

Q2 net income (adjusted): $2 billion (-7% Y/Y)
Earnings per share (adjusted): $2.59

Q2 2023Q1 2024Q2 2024
Residential mortgage portfolio$143.8B$150B$151.8B
HELOC portfolio$48.1B$48.7B$48.9B
Percentage of mortgage portfolio uninsured70%71%72%
Avg. loan-to-value (LTV) of uninsured book52%56%56%
Mortgages renewing in the next 12 months$23B $17.6B$20.5B
% of portfolio with an effective amz of <25 yrs55%56%56%
90-day delinquency rate (mortgage portfolio)0.14%0.17%0.19%
Canadian banking net interest margin (NIM)2.70%2.77%2.80%
Total provisions for credit losses$1.02B$627M$705M
CET1 Ratio12.2%12.8%13.1%
Source: BMO Q2 Investor Presentation

Conference Call

On deposit growth and customer acquisition:

  • BMO saw its total Canadian deposits grow 9% year-over-year “due to new customer acquisition, a comprehensive onboarding program and increased customer primacy.”
    • “We’ve seen strong momentum from newcomers to Canada, up 35% compared with last year, due to the success of BMO’s New Start program,” said President and CEO Darryl White.

On reduced rate-cut expectations:

  • “We now expect somewhat fewer and delayed rate cuts this year in both Canada and the US, with the Bank of Canada expected to begin lowering rates this summer and the Fed in the fall at a moderated pace,” White said.
  • “We expect that the delay in central bank easing of monetary policy and slowing economic activity could keep impaired provisions at around [current] levels over the next couple of quarters,” said Chief Risk Officer Piyush Agrawal.

On commercial real estate:

  • Canadian commercial impaired loan provisions were $48 million, or up $14 million from last quarter.
  • “Commercial real estate, including office, is performing in-line with our expectations and we maintain strong coverage,” said Agrawal. “But given the rate environment, we do expect modest provisions going forward.”

On BMO’s risk appetite given rising provisions for credit losses:

  • “Nothing has changed. Our appetite hasn’t changed, our underwriting practices haven’t changed,” said President and CEO Darryl White. “The composition, particularly in the wholesale side of the business, where, as we told you before 90% of the relationships are sole or lead relationships, haven’t changed.”

Source: BMO Q2 conference call

Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.

Featured image: Igor Golovniov/SOPA Images/LightRocket via Getty Images