BMO profit up 6% on strength in U.S. bank unit

The Bank of Montreal saw its third-quarter profit climb six per cent from last year, but analysts say a troubling trend in the bank's oil and gas loan book is the first sign of challenges ahead for Canada's biggest lenders.

BMO's net income for the quarter rose to $1.19 billion while adjusted net income was $1.23 billion, both up six per cent.

The profit amounted to $1.86 per share of net income and $1.86 per share of adjusted earnings on $4.826 billion of revenue.

Concerns have swirled around the Canadian banks due to the dramatic plunge in the price of oil, but so far, that hasn't affected their bottom lines.

Patrick Blais, senior portfolio manager at Manulife Asset Management, says BMO's solid third-quarter results indicate that it will be some time before the full impact of the oil decline materializes in the earnings results for the banks.

"BMO is showing us that credit losses are probably not this quarter's story," said Blais.

Impaired loans

However, Edward Jones analyst Jim Shanahan said impaired loans to the oil and gas sector were up "sharply" from the previous quarter, totalling $106 million — an increase of $80 million from the second quarter, when impaired loans to the oilpatch were $26 million.

Blais said that although the uptick in impaired business loans is "fairly sizable," the banks are good at diversifying in order to minimize their exposure to cyclical industries such as the oilpatch.

"At the end of the day, it's not the direct exposure that worries us — we think that's manageable," said Blais.

"It's more the indirect cost of the energy slowdown that might have a greater impact, but is definitely harder to gauge — and that basically means the impact on the Canadian consumer out west. I think it's just a question of time before it filters through to higher consumer loan losses, and that's where we'll see a bigger impact."

The bank's chief risk officer told investors during a conference call Tuesday that the bank is closely monitoring its personal loan books for signs that oilpatch woes are spreading to consumers.

"Although in Alberta we have seen a slight quarterly increase in delinquencies in some consumer products, there is no discernible trend," Surjit Rajpal said.

"Consumer delinquencies in Alberta are down year-over-year and remain below national average."

Rajpal said it takes time for things like commodity prices to trickle through the economy, saying it's difficult to predict how long it will take before the full effects of oil's precipitous decline are felt.

"I can't really give you any specificity in terms of how lagged it's going to be," he said. "We are watching closely and we wouldn't be surprised if we saw something but we haven't seen anything yet."

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