Bad oil-and-gas loans soar as BMO profit tops estimates

TORONTO (Reuters) - Bank of Montreal BMO.TO on Tuesday reported that bad oil-and-gas loans increased sharply in the third quarter as profit topped market expectations on growth in its wealth management unit and personal and commercial banking.

The logo for the Bank of Montreal is seen at its branch Toronto, March 5, 2013. REUTERS/Mark Blinch

The bank’s stock, down about 12 percent in the last three months, rose on Tuesday as much as 5.2 percent before ending up 1.6 percent at C$67.82 and joining a broad market rebound after a sharp sell-off in the previous session.

BMO’s results kicked off the earnings season for major Canadian banks amid investor concerns about a sluggish Canadian economy and turmoil in the energy industry.

“The oil-and-gas portfolio will see some strain under a prolonged period of low prices,” Surjit Rajpal, BMO’s chief risk officer, said on a conference call, noting the company’s oil-and-gas exposure was 2 percent of total loans.

The lender’s gross impaired loans from the oil-and-gas sector rose fourfold to C$106 million in the quarter from C$26 million in the second quarter. They were C$1 million a year earlier.

Almost all of the weakness was in the U.S. market, where BMO, Canada’s fourth-largest bank, has a significant presence. U.S. energy companies tend to have more debt than their Canadian counterpoints.

“It is a pretty sharp increase,” Edward Jones analyst James Shanahan said. “This is absolutely a trend. It is substantial weakness within the oil-and-gas portfolio at BMO, no doubt.”

The numbers underscored how the oil sell-off has affected Canadian lenders, which are very active in the energy industry. On Tuesday, oil bounced back from heavy losses, but global oversupply and worries about the severity of the economic slowdown in China kept prices near 6-1/2-year lows. [O/R]

“This may be only the tip of the iceberg. You’re going to see this continue and develop,” said David Cockfield, portfolio manager at Northland Wealth Management, about bad loans in the energy sector. Northland is a BMO shareholder.

“It’s a fairly significant adjustment in a major industry. So it is a concern.”

At Bank of Montreal’s personal and commercial banking unit, net income in the quarter at the U.S. division increased 38 percent, while profit at the corresponding Canadian segment rose 6 percent. Wealth management profit increased 6 percent.

Total net income in the quarter, ended July 31, rose to C$1.19 billion, or C$1.80 per share, from C$1.13 billion, or C$1.67, in year-earlier period. On an adjusted basis, earnings were C$1.86 per share.

Analysts, on average, expected earnings of C$1.73 a share, according to Thomson Reuters I/B/E/S.

Editing by Chizu Nomiyama, Jeffrey Benkoe and Steve Orlofsky