BMO Financial Group sees "potentially more upside" when it comes to cost savings from its deal for Bank of the West, a top executive said Tuesday.
Canada's third-largest bank initially outlined roughly $368 million USD in cost savings from the acquisition, which closed early this year. BMO said Tuesday that it remains ahead of schedule on expense reductions despite a challenging U.S. economic environment, and that it will further specify anticipated synergies when it reports fourth-quarter results in November.
BMO said that it expects reduced spending on technology and third-party vendors to result in more plentiful savings than it first anticipated.
"With the benefit of additional analysis over the last two quarters since we closed the transaction, we believe there is potentially more upside," Tayfun Tuzun, chief financial officer at BMO, said during the company's third-quarter earnings call.
BMO previously warned that
Earlier this year, the bank cut its 2023 loan-growth forecast from the high single digits to the mid single-digit range. The bank has also cautioned investors about the impact of higher interest rates, saying they have weighed on revenue across business lines in the United States and Canada.
"We're all aware of the macro headwinds facing the industry," BMO Chief Executive Officer Darryl White told analysts on Tuesday. "These external forces are influencing the environment we're operating in, and I believe they could persist for some time to come."
Loan growth in the bank's U.S. personal and commercial segment fell sequentially in the third quarter. Net interest margin in the same U.S. segment fell to 3.8%, down from 3.96% in the second quarter.
And BMO expects U.S. loan demand to remain muted for the remainder of 2023, executives said.
"While Canada looks better than expected … the U.S. segment, which is where the spotlight is for this bank given the Bank of the West deal, looks worse," Scotiabank analyst Meny Grauman wrote in a research note.
Other Canadian banks have also identified the tougher U.S. operating environment as one of the major challenges they're facing, analysts said.
During BMO's third quarter, which ran from May through July, the company reported more upbeat trends on the deposit front. Its total deposits grew 22% year over year thanks to the customers acquired from Bank of the West and higher balances among Canadian personal and commercial banking customers, executives said.
But BMO's quarterly earnings were hurt by one-time expenses related to severance and legal proceedings. The severance costs were related to BMO's decision to lay off 2.5% of its full-time employees, executives said during the earnings call. BMO earlier this month told the state of California that it
"Outside of these events, the bank's earnings were essentially in line with expectations," Barclays analyst John Aiken wrote in a research note.
The conversion of Bank of the West customer accounts and systems onto BMO platforms is scheduled for Labor Day weekend.
During the third quarter, BMO reported provisions for credit losses of C$492 million, or $363 million in U.S. dollars, a 261% increase from the same period last year.
The bank reported revenue growth of 22%, driven by higher margins in its Canadian personal and commercial banking segment and solid contributions from Bank of the West. Net income was $1.07 billion USD, higher than the $1.01 billion recorded a year earlier, but below analysts' expectations.
BMO said its fourth-quarter dividend would remain at the same level as its third-quarter payout — $1.47 per share.
BMO shares fell about 2.5% when the market opened Tuesday before recovering their losses. The bank's stock price finished at $84.30, up 0.5%. Shares are down about 7% this year.
