Bank of Montreal CEO promises ‘accountability’ after earnings again hit by restructuring charges

Bank of Montreal CEO promises ‘accountability’ after earnings again hit by restructuring charges
The chief executive of the Bank of Montreal vowed Tuesday that there will be “ongoing accountability” on costs at the bank after it was forced to take yet another restructuring charge in connection with job cuts.

BMO reported on Tuesday net income of nearly $1.2 billion for the three months ended Oct. 31, down from about $1.7 billion a year earlier, due in part to a $484-million pre-tax restructuring charge for its fiscal fourth quarter.

BMO CEO Darryl White told analysts during a conference call that the decision was made “with serious consideration,” and was in line with its strategy.

“All areas of the bank contributed to the charge, and there will be ongoing accountability throughout the organization for the decisions that have been made,” White said.

BMO’s chief financial officer, Tom Flynn, said the restructuring charge . He added that the bank expects the measures to create savings of approximately $200 million in fiscal 2020 and to find run-rate savings of about $375 million by the first quarter of fiscal 2021.

The comments came after the Toronto-based lender also reported it had cut the number of full-time equivalent employees by 810 from the previous quarter, to 45,513 total for the period ending Oct. 31.

However, the restructuring costs have been a recurring theme for BMO, which has posted five such charges in the past four years, totalling around $800 million after taxes, noted National Bank Financial analyst Gabriel Dechaine. Most recently, the bank posted a $90-million after-tax severance expense in the second quarter, attributed to the bank’s capital-markets unit.

“The divergence from other banks (i.e., relatively quiet since 2015/2016) raises concerns that BMO has structural cost issues, which is a reasonable conclusion,” Dechaine wrote in a report.

White, though, suggested that the restructuring costs could be coming to an end (something Dechaine noted).

One of BMO’s key targets has to do with what is known as its efficiency ratio, which is non-interest expense divided by revenue. BMO’s adjusted efficiency ratio was 60 per cent for the quarter, down from 62.2 per cent a year ago, but the bank has set the goal of achieving 58 per cent by 2021.

The bank is holding a lot more tightly on expense growth

BMO CEO Darryl White

White said that the latest charge would help BMO in reaching its efficiency target, “while continuing to optimize efficiency beyond that without the need for additional charges.”

In response to an analyst question, the CEO noted it was a “sizable move” affecting five per cent of the bank’s workforce, that the bank was “holding the line a lot more tightly” on expense growth and that the discipline they expect from managers does not include a “reliance on this technique and the assist of a charge.”

“And so that’s a very sort of clear message to the entire organization in terms of how we expect to manage ourselves going forward,” White said. “So when I put all those together, in addition to the real benefits that we’re starting to see from technology and digitization, we’re confident in telling you that we’ll retire this play from our playbook.”

Affecting BMO’s latest results as well was a $25-million reinsurance “adjustment” connected to the net impact of claims from Japanese typhoons, which hit the bank after its previously announced decision to wind down the reinsurance business.

With the latest restructuring charge removed, BMO’s profit for the quarter was $1.6 billion, up five per cent from the same three months of 2018. Adjusted earnings per share were $2.43, an increase of five per cent and slightly above the $2.41 that analysts were expecting.

The bank said its results were boosted by good showings from its retail businesses and greater earnings out of its wealth management unit, offset somewhat by a drop in net income from its capital-markets operations. The previous year’s results also included a “favourable tax item” in the U.S.

“It is difficult for us to credit good expense control in the face of yet another restructuring charge from this bank, this time approaching $500 million,” CIBC World Markets analyst Robert Sedran wrote in a note. “However, the underlying segment performance was solid with improving volume growth, positive operating leverage, and stable credit quality. A decent result.”

BMO’s stock price fell Tuesday, finishing the day 2.1 per cent lower at $98.57.

For its fiscal 2019, which wrapped up at the end of October, BMO reported earnings of almost $5.8 billion, up nearly six per cent from the previous year.

In addition to the earnings, BMO announced it was hiking its quarterly dividend payment by three cents to $1.06 per common share.

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