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BMO reported rising loan losses in the first quarter and anticipates a further increase before conditions improve in the second half of the year with expected Bank of Canada rate cuts.

The bank also set aside $627 million in loan loss provisions, which are funds banks must keep on hand to cover potential future losses. That’s up from $446 million in the previous quarter.

The losses have been concentrated primarily in unsecured lending, including consumer loans, credit cards and business and government loans.

“We continue to expect that the higher level of interest rates and slowing economic activities will be reflected in somewhat higher impaired loss rates…for the year with some variability quarter-to-quarter,” said Chief Risk Officer Piyush Agrawal.

While mortgage delinquencies were up in the quarter, rising to 0.17% from 0.14% in Q4, Agrawal said the bank is continuing to see “resiliency” among its mortgage clients.

$7B worth of mortgages came out of negative amortization in Q1

BMO reported that $23 billion worth of its variable-rate mortgages—or roughly half of its variable-rate portfolio and 15% of its total mortgage portfolio—remain in negative amortization. That’s down by $7 billion, or 23%, from the fourth quarter.

  • 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.

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

While just 12% of BMO’s mortgage portfolio, or roughly $17.6 billion worth of mortgages, are up for renewal in 2024, more than 70% will reach maturity in 2025 and beyond.

The bank expects average payment increases starting at $250 for those renewing this year, rising to $350 for 2025 renewals and $450 for 2026 renewals, if interest rates remain near current levels.

It added that customers who renewed their mortgages in 2023 experienced an average increase to their regular payments of 22% for variable rate mortgages and 21% for fixed rate mortgages.

“While higher rates are expected to impact borrowers and renewal or refinancing, our internal analytics indicate that customers have the capacity to absorb these higher payments,” Agrawal added.

BMO has also continued to see the share of its mortgages with a remaining amortization above 30 years continue to decline each quarter, reaching 24.7% as of Q1, down from nearly a third a year ago.

Of BMO’s $150-billion mortgage portfolio, 32% are variable-rate mortgages.

Remaining amortizations for BMO residential mortgages

 Q1 2023 Q4 2023 Q1 2024
16-20 years 13.4% 13.6% 13.9%
21-25 years 31.7% 32.1% 32.4%
26-30 years 13.1% 18% 19.3%
30 years and more 32.4% 27% 24.7%
Remaining amortization is based on current balance, interest rate, customer payment amount and payment frequency.

Q1 net income (adjusted): $1.9 billion (-12% Y/Y)
Earnings per share (adjusted): $2.56

Q1 2023 Q4 2023 Q1 2024
Residential mortgage portfolio $141.7B $150.6B $150B
HELOC portfolio $48B $48.7B $48.7B
Percentage of mortgage portfolio uninsured 70% 71% 71%
Avg. loan-to-value (LTV) of uninsured book 51% 55% 56%
Mortgages renewing in the next 12 months $23B $16.2B $17.6B
% of portfolio with an effective amz of <25 yrs 55% 55% 56%
90-day delinquency rate (mortgage portfolio) 0.13% 0.14% 0.17%
Canadian banking net interest margin (NIM) 2.70% 2.74% 2.77%
Total provisions for credit losses $217M $446B $627M
CET1 Ratio 12.2% 12.5% 12.8%
Source: BMO Q1 Investor Presentation

Conference Call

  • The bank’s Personal and Business Banking saw net new customer growth up 7% year-over-year.
  • Loan volumes were up 5% year-over-year and 1% quarter-over-quarter.
  • The bank said impaired losses in Canadian retail banking were $204 million, up $14 million from prior quarter.
  • BMO expects Bank of Canada rate cuts to begin in the second half of 2024, with a total reduction of 100 basis points (one percentage point) by the end of the calendar year, which would bring the overnight target rate down to 4.00%.

Source: BMO Q1 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

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