High interest rates drove BMO’s mortgage delinquency rate higher in the third quarter, according to the bank’s latest earnings results.
As Canada’s fourth-largest bank, BMO also reported that it was forced to set aside significantly more funds—$906 million—for potential losses, reflecting the growing financial strain on borrowers.
The bank saw 90+ day delinquencies in its mortgage portfolio rise to 0.24% in the quarter, up from 0.20% last quarter and 0.15% of its portfolio a year ago.
“Specific client segments continue to feel the impact of prolonged elevated interest rates, tightening of credit conditions as well as shifting consumer demand for products and services,” said Chief Risk Officer Piyush Agrawal.
“Moreover, rising unemployment in Canada and reduced pandemic-related liquidity are challenging consumer and business balance sheets,” he added. “This has led to credit downgrades in our portfolio with higher watch list and impairments.”
BMO reported that its Canadian Personal and Business Banking impaired losses were up $27 million from prior quarter.
CEO Darryl White noted that the cyclical increase in credit costs “has resulted in loan loss provisions above our historical range, which has not met our expectations.”
“We’ve investigated the circumstances that led to recent impairments and the conclusion is, for some customers, the combination of prolonged high interest rates, economic uncertainty, and changing consumer preferences had an acute impact,” he said on the third-quarter earnings call. “This is presented in a relatively limited list of borrowers. For instance, only 15 accounts comprise almost 50% of year-to-date impaired provisions in our wholesale portfolio.”
Despite the current challenges, White added that BMO “has a long history of superior credit management and that has not changed.”
Agrawal said the bank is continuing to take action to manage losses, “including pre-delinquency engagement with customers most vulnerable to payment stress.”
In the bank’s Commercial Banking division, impaired losses increased by $31 million.
Losses blamed on post-pandemic underwriting
BMO’s executive team explained that there are no industry or geographic themes amongst the losses. Instead, they say it’s due to market conditions during the time of underwriting, which was soon after the COVID-19 pandemic.
“What we’re experiencing here is effectively the delayed consequence of the dynamics that were pretty unique to a pandemic,” explained White. “There’s a vintage of, I call them, pandemic loans that might have had higher leverage and larger holds than if we were able to do them again.”
Agrawal added that those were “exceptional circumstances” and that liquidity was high at the time, which “carried consumers [and] carried companies.”
“We’ve gone back, looked at our entire book, combed through underwritings we’ve done and really it comes down to a handful of accounts that are now on our watch list, which is why we are guiding you to a higher elevated performance for the next few quarters,” he said.
32% of BMO’s variable-rate mortgages still in negative amortization
BMO also disclosed details about its mortgage portfolio and the status of its fixed-payment variable-rate mortgage clients.
As of Q3, BMO has $15.1 billion worth of mortgages in negative amortization, representing about 32% of its total variable-rate mortgage portfolio. This is down from a peak of 62% of its variable-rate mortgages in negative amortization and 42% in Q2.
- 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 previously.
The bank also provided updated figures on the number of renewals it anticipates in the coming years.
The bank expects 14%, or $22.6 billion, of its mortgage balances to renew in the next 12 months, with another 70% of its mortgage portfolio up for renewal after fiscal 2025.
BMO has also continued to see the share of its mortgages with a remaining amortization above 30 years continue to decline each quarter, reaching 23.6% as of Q2, down from nearly a third a year ago.
Remaining amortizations for BMO residential mortgages
| Q3 2023 | Q2 2024 | Q3 2024 | |
|---|---|---|---|
| 16-20 years | 13.4% | 14.1% | 14.6% |
| 21-25 years | 31.6% | 32.2% | 32.4% |
| 26-30 years | 15.8% | 20.4% | 22.3% |
| 30 years and more | 29.8% | 23.6% | 20.9% |
BMO earnings highlights
Q3 net income (adjusted): $2 billion (-8% Y/Y)
Earnings per share (adjusted): $2.64
| Q3 2023 | Q2 2024 | Q3 2024 | |
|---|---|---|---|
| Residential mortgage portfolio | $147.7B | $151.8B | $155.8B |
| HELOC portfolio | $48.5B | $48.9B | $49.5B |
| Percentage of mortgage portfolio uninsured | 71% | 72% | 73% |
| Avg. loan-to-value (LTV) of uninsured book | 55% | 56% | 51% |
| Mortgages renewing in the next 12 months | $21B | $20.5B | $20.5B |
| % of portfolio with an effective amz of <25 yrs | 54% | 56% | 57% |
| 90-day delinquency rate (mortgage portfolio) | 0.15% | 0.20% | 0.24% |
| Canadian banking net interest margin (NIM) | 2.77% | 2.80% | 2.77% |
| Total provisions for credit losses | $492B | $705M | $906M |
| CET1 Ratio | 12.3% | 13.1% | 13.0% |
Conference Call
On deposit growth:
- “Strong growth in customer deposits continues with average balances up 9% from last year, driven by higher deposits in our U.S. and Canadian personal and commercial businesses,” said Chief Financial Officer Tayfun Tuzun.
On the impact of Bank of Canada rate cuts in the coming quarters:
- “As we’ve talked about in many calls, the transmission of central bank policy takes about 6 to 12 months to go through the system. So that should start helping the market start helping consumers. And so that’s why the next couple of quarters elevated. And then after that, receding back to our long-term normal and our long-term averages are in the range of about 36 basis points that we’ve seen over the last 30 years,” said Chief Risk Officer Piyush Agrawal. “For the next couple of quarters, higher than what you saw this quarter.”
On commercial real estate:
- “In Commercial Banking, loan and deposit growth is strengthening in Canada and while softer in the US, we continue to acquire new clients and increase deposit penetration,” said White.
Source: BMO Q3 conference call
Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.
Feature image by Igor Golovniov/SOPA Images/LightRocket via Getty Images
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