BMO beats Bank of the West cost-savings goal, yet quarterly profits fall

Christinne Muschi/Bloomberg

BMO Financial Group has made good on the cost-cutting plan it laid out in connection with last year's acquisition of Bank of the West in San Francisco, executives told analysts on Tuesday.

As of Feb. 1, the Toronto-based company had wrung out $800 million USD in pretax annual cost savings, nearly 20% more than BMO's original estimate of $670 million, CEO Darryl White said during a conference call to discuss the bank's performance in the quarter ended Jan. 31. New deposit relationships in California increased 38% year over year, and more than 90% of Bank of the West's clients have been retained by BMO following a systems conversion in early September, White added.

And it's making progress on a separate plan to trim an additional $400 million CAD in expenses by the end of 2024, with $325 million CAD of that total already squeezed out, White said.

"In the U.S., we're executing against a very specific plan," said White, noting that BMO's U.S. subsidiary has consistently churned out pre-provision, pretax earnings above $1 billion USD since the deal closed on Feb. 1, 2023,  and contributes 45% to the company's total earnings. "We've sustained this performance despite intensified deposit competition and decreased loan demand."

Those were some of the bright spots in a rather tough quarter for Canada's third-largest bank by assets, which reported net income declines in three of its five business segments due to a mix of higher expenses, a bigger provision for credit losses and one-time items.

Net income fell in U.S. personal and commercial banking, Canadian personal and commercial banking and BMO capital markets, the company said. Meanwhile, corporate services reported a net loss, while the wealth management unit reported an increase in net income, although net income fell at its wealth and asset management segment due to lower deposits and higher expenses.

The company set aside $627 million CAD in credit-loss provisions, compared to $217 million CAD in the first quarter of 2023.

Several items affected earnings in the bank's fiscal first quarter, including acquisition and integration costs, a net accounting loss on the sale of a recreational vehicle loan portfolio and a loss related to interest rate changes between the time the Bank of the West deal was announced and when it closed.

Excluding those one-time items, adjusted net income was $1.9 billion CAD, down from $2.2 billion CAD in the year-earlier quarter. Adjusted earnings per share were $2.56 CAD, down from $3.06 CAD.

BMO "kicked off the year with disappointing earnings," Jefferies analyst John Aiken wrote Tuesday in a research note. He cited revenue misses in insurance and capital markets.

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Still, Aiken said there's a reason to be optimistic about the company's performance this year.

"While disappointing, we do not believe that the quarter represents a new run-rate and anticipate a rebound in profitability in the second quarter, particularly if BMO can maintain its strong cost controls through the [Bank of the West] integration" and achieve greater efficiency, he wrote.

BMO acquired the $105 billion-asset Bank of the West from the French giant BNP Paribas. The deal, which was valued at $16.5 billion when it was announced in December 2022, was one of the largest bank acquisitions to close in 2023 and gave BMO a sizable presence in California — where Bank of the West had the eighth-largest market share — and a foothold in several other states where BMO Harris had no branches, such as Colorado, New Mexico and Oregon.

To help secure U.S. regulatory approval, BMO agreed to a five-year, $40 billion community benefits plan that's focused on boosting the company's lending in underserved markets.