May 26, 2009 / 11:57 AM / 8 years ago

UPDATE 5-Bank of Montreal tops estimates; to cut 1,100 jobs

5 Min Read

* Q2 EPS C$0.61 vs C$1.25

* Adjusted EPS slightly ahead of expectations

* Says to cut 3 pct of workforce

* Shares jump 4.6 pct, sector up on investor relief (Adds CEO comment from conference call, edits)

By Andrea Hopkins

TORONTO, May 26 (Reuters) - Bank of Montreal (BMO.TO) posted a stronger than expected quarterly profit on Tuesday, and said it was cutting 1,100 jobs, sending Canadian bank shares higher as investors bet that other big lenders reporting this week will also notch profits.

Canada's fourth-largest bank said it was cutting its 37,000-strong workforce by 3 percent across all operating groups in a move it said would save money down the road.

"The changes are expected to reduce ongoing costs and position our businesses to grow revenue and improve profitability with no reduction in our customer service," Chief Executive Bill Downe said in a statement.

Provisions for bad loans at BMO were not as high as some analysts had expected, illustrating how the nation's banking sector remains far healthier than that of its global peers.

"I think it was almost a collective sigh of relief from the marketplace today," said Edward Jones analyst Craig Fehr. "No outsized losses, no huge surprises ... I think the implication is the banks can continue to perform fairly well within their core banking operations."

Bank of Montreal shares rose 4.6 percent to C$43.47 on the Toronto Stock Exchange, while the broader financial index powered 4.1 percent higher, as BMO kicked off earnings season for the nation's Big Six banks.

The bank reported its profit fell 44 percent to C$358 million ($317 million), or 61 Canadian cents a share, in the second quarter, ended April 30. That was down from C$642 million, or C$1.25 a share, a year earlier.

The big drop in profit was shrugged off in part because the results included one-time charges of C$80 million for losses in BMO's backup financing operations and C$80 million in severance costs for the job cuts, which BMO said will be made at both the head office and corporate support levels.

Excluding those items, its adjusted cash earnings of 93 Canadian cents per share came in just above expectations.

The bank set aside a big chunk of money to cover bad loans, considered the biggest headwind for the recession-weary sector, but the provisions for credit losses were not as high as some analysts had forecast.

Downe himself said the biggest question for all of the banks is how credit will stand up as economic pain drags on.

"As we look at the balance of 2009 and early 2010, we expect (provisions for credit losses) to remain elevated. However, we have not seen and are not expecting to see a further broad-based spike up," Downe told analysts on a conference call following the earnings release.

He noted loan loss provisions have moved up faster in the United States than in Canada, but that could soon shift.

"If the economy improves later this year, some predict U.S. provisions could begin to plateau. Provisions in Canada remain relatively low but may well increase as we move through the recession," Downe said.

Fat Capital Levels

The global economic slump is taking its toll on the loan portfolios of Canadian banks, as consumers and businesses struggle to repay debts amid rising unemployment.

Bank of Montreal said the money it set aside to cover bad loans rose to C$372 million, up C$221 million from a year ago.

Analysts sifted through the bank's results for hints of what Canada's other big banks will report later in the week.

"There was nothing too troubling or surprising in BMO's results, which will likely translate to the other banks. This will allow the banks to sustain their valuations in the near term," Dundee Securities analyst John Aiken wrote.

Royal Bank of Canada (RY.TO), Toronto-Dominion Bank (TD.TO), Bank of Nova Scotia (BNS.TO), Canadian Imperial Bank of Commerce (CM.TO) and National Bank of Canada (NA.TO) report second-quarter results on Thursday and Friday.

The weakness on BMO's loans side was offset by gains in its capital markets division, where income surged 33 percent, and in its Canadian personal and commercial banking, where income was 9 percent higher than a year earlier.

Net interest income was also a bright spot, increasing 14 percent. Banks make money by borrowing it cheaply from deposit-making customers and lending it at a higher rate.

The quarter's profit boosted BMO's Tier 1 capital ratio to 10.7 percent, well above global competitors and the minimum required by regulators.

As expected, the bank left its quarterly dividend unchanged at 70 Canadian cents per common share.

$1=$1.12 Canadian Reporting by Andrea Hopkins; editing by Rob Wilson

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