BMO suffers, CIBC surges as banks say credit woes have peaked

Concerns about looming credit losses appear to have peaked at two of Canada’s largest lenders, but Bank of Montreal BMO-T is paying a heavy price for a ballooning watchlist of bad loans, while the pressure is easing and profit is rising at Canadian Imperial Bank of Commerce CM-T.

Leaders at both banks said Thursday they are hopeful that falling borrowing costs will create better conditions for clients in 2025, wrapping up a challenging fiscal year by reporting sharply contrasting fourth-quarter results.

BMO missed profit expectations by a wide margin in the three months that ended Oct. 31 as it added $1.52-billion in new provisions against loans that could default, which was far more than analysts expected. That wiped out any earnings growth from the bank’s Canadian and U.S. retail banking divisions.

Chief executive officer Darryl White said on a Thursday conference call that BMO’s credit performance “deteriorated more than we expected” in 2024. The bank has made changes to certain underwriting parameters, he said, and the level of provisions BMO needs to guard against future losses should start to “moderate” next year.

At CIBC, loan books held up better than analysts anticipated, mostly because the outlook improved for the bank’s U.S. commercial real estate portfolio, especially in the troubled office sector. Provisions for credit losses of $419-million were 23 per cent lower than last year.

CIBC sold off a portion of its U.S. office loans earlier this year and, in some cases, clients have paid down debt. Chief financial officer Robert Sedran said in an interview that he expects “a whole lot less noise” from commercial office loans next year.

CIBC’s revenue rose 13 per cent and its income from interest was up 17 per cent as profit margins on lending increased. The bank’s earnings per share rose by 24 per cent and comfortably beat analysts’ estimates.

“Looking ahead, we expect mortgage growth and consumer discretionary spending to accelerate as lower interest rates spur client demand through 2025,” chief executive officer Victor Dodig said on a Thursday conference call.

CIBC’s share price rose 4.4 per cent to $93.54 on Thursday, while BMO’s shares climbed 4.2 per cent higher to $139.73 on the Toronto Stock Exchange.

At the core of BMO’s credit issues are a series of commercial loans the bank made in 2021, in the wake of the COVID-19 pandemic. Several of the most problematic loans were to new clients, and Mr. White said BMO held more of the risk on its balance sheet than it should have. “In hindsight, the client selection as a result of that wasn’t exactly ideal,” he said.

Chief risk officer Piyush Agarwal called the fourth quarter “a high point” for loan-loss provisions. BMO expects to continue adding to its reserves against loan losses over the coming quarters, but in smaller amounts. By the second half of 2025 and early 2026, BMO expects its provisions to decline to more typical levels.

For now, Mr. White said, commercial loans the bank made more recently are performing better, and BMO still has an appetite for commercial lending.

“You should see us move with the market,” he said. “We’re not trying to press ahead and grow at rates that far exceed the market, nor do we expect to give up any market share.”

BMO profit climbed 35 per cent to $2.3-billion – or $2.94 a share – from the same quarter last year. The bank benefited from the reversal of an $870-million legal provision after an appeal court ruled in BMO’s favour on a lawsuit stemming from a Ponzi scheme that used an account at a bank BMO acquired.

On an adjusted basis, BMO said it earned $1.90 a share, while analysts expected $2.38 a share.

CIBC’s leaders expect competition to ramp up in the mortgage market, where its 1-per-cent rate of growth trailed peers last fiscal year. Some analysts have speculated that a wave of mortgage renewals at higher interest rates over the next year could spark a price war among lenders.

But executives said they are consciously preserving profit margins by focusing on attracting and keeping clients who use more of the bank’s products and services.

“Where we can serve them well, we’re happy to compete aggressively for that business,” Mr. Sedran said in an interview. “In areas where it’s just a single–product customer that doesn’t have any need for more of a relationship and doesn’t want advice, we’re not going to be in a position where we are competing aggressively for that business.”

From the same quarter last year, CIBC’s profit rose 27 per cent to $1.88-billion in the fourth quarter, or $1.90 a share. Adjusted earnings per share of $1.91 beat analysts’ consensus estimate of $1.79 a share.

Each bank raised its quarterly dividend. CIBC increased its payout by 8 per cent to 97 cents, and BMO announced a 5-per-cent hike to $1.59.