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  • Writer's pictureJose Gustavo Salcedo

BMO Reports Increased Delinquencies, Predicts Prolonged High Interest Rates

BMO Reports Increased Delinquencies, Predicts Prolonged High Interest Rates

In its latest financial report, BMO has noted a rise in delinquencies during the second quarter and anticipates that high interest rates will persist for a while. Here are the key points from their report:


Rise in Delinquencies

  • Real Estate Secured Lending (RESL): Delinquencies for payments overdue by 90+ days increased to 0.19%, up from 0.17% last quarter and 0.14% a year ago.

  • Unsecured Lending: Actual losses have mainly occurred in unsecured loans such as consumer loans, credit cards, and business loans.


Credit Challenges

  • Loan Loss Provisions: BMO set aside $705 million in loan loss provisions, an increase from $627 million in the previous quarter.

  • Future Losses: Losses are expected to rise as clients struggle with payments due to high interest rates.


Interest Rate Predictions

  • Rate Cuts: BMO has revised its rate-cut expectations, now predicting fewer and delayed cuts. The Bank of Canada might start lowering rates this summer, with the U.S. Federal Reserve following in the fall.


Mortgage Portfolio Insights

  • Negative Amortization: 42% of BMO’s variable-rate mortgages are in negative amortization, down from a peak of 62%.

  • Negative Amortization Explained: This occurs when monthly payments do not cover the full interest amount, causing the mortgage balance to increase.

  • Mortgage Renewals: Only 14% of mortgage balances are set to renew in the next 12 months, with the majority up for renewal after fiscal 2025.

  • Payment Increases: Those renewing their mortgages have seen average payment increases of 22% for variable mortgages and 19% for fixed mortgages.


Proactive Customer Outreach

  • Success in Reducing Negative Amortization: BMO’s outreach efforts have been successful, helping many customers take actions to manage their mortgages better.

  • Continued Efforts: BMO plans to continue its proactive outreach to assist customers with various lending products, aiming to reduce potential losses.


Financial Metrics

  • Net Income: Adjusted net income for Q2 was $2 billion, a 7% decline year-over-year.

  • Earnings Per Share: Adjusted earnings per share stood at $2.59.

  • Mortgage Portfolio: The total residential mortgage portfolio increased to $151.8 billion.

  • Loan-to-Value (LTV): The average LTV for the uninsured mortgage book is stable at 56%.

  • Canadian Banking Net Interest Margin (NIM): Increased slightly to 2.80%.


Deposit Growth and Customer Acquisition

  • Canadian Deposits: Grew by 9% year-over-year, driven by new customer acquisition and successful onboarding programs.

  • Newcomers to Canada: Saw a 35% increase in momentum due to BMO’s New Start program.


Commercial Real Estate

  • Impaired Loan Provisions: Canadian commercial impaired loan provisions increased to $48 million.

  • Performance: Commercial real estate, including office space, is performing as expected, though modest provisions are anticipated.


Risk Appetite

  • Unchanged Practices: BMO’s risk appetite and underwriting practices remain unchanged, maintaining strong coverage and lead relationships.


Overall, BMO is navigating a challenging economic environment with proactive measures and adjustments to its forecasts, aiming to support its customers and manage credit risks effectively.


Adapted by Jose Gustavo




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