This is going to be a busy week for Bay Street analysts and investors alike as each of the major Canadian banks (Bank of Montreal, CIBC, Royal Bank, TD Bank, National Bank of Canada, and Scotiabank) report their Q3 numbers.

BMO (Bank of Montreal) was the first out of the gate when it reported earnings Tuesday. I will first take a brief look at the overall numbers (top line and bottom line) and then do the same for the individual reporting segments.

BANK OF MONTREAL Q3 2015 (May to July 2015; change is from Q3 2014)

The Bank turned in a decent set of numbers in a challenging environment. Q3 net revenues climbed 9% (including 4% positive impact from strengthening US Dollar) or $393M…with $302M or 77% (~ 7% weighted) of top line growth coming from a reduction in insurance claims, commissions, and changes in (insurance) policy benefits and the balance of $91M or 23% (~ 2% weighted) coming from the bank’s remaining business activities. 2% top line growth from non-insurance is OK. Quality of top line was good too…no noise by way of unusual items.

Reported Q3 EPS grew by 13 cents or 8% YoY to $1.80 from $1.67. Earnings quality was good here too…small adjustment of $38M (after tax) relating to the acquisition of fund management company F&C Asset Management PLC and other M&A activity together with a small reduction in average diluted number of shares outstanding at the end of the current period versus last year. Adjusted EPS was $1.86 versus $1.73 in the year ago period (+13 cents, +7.5%).

Slightly concerning was the rise in PCL to $160M from $130M in the year ago period.

CANADIAN PERSONAL & COMMERCIAL BANKING (CANADIAN P&C)

Total revenue increased $60M or 3.7% YoY to CAD$1.698B, with Net Interest Income leading the gain at $45M or 75% of top line growth and Non-interest Income climbing $15M. Top line growth was led by personal business at $49M. Management credited the change to higher balances across most products.

Unfortunately, non-interest expenses climbed $37M or 4.6% to $845M resulting in negative jaws. The resulting expense growth outstripping revenue growth resulted in a slight decline in the segment’s Efficiency Ratio to 49.8% from 49.3% in the year-ago period. The rise in expenses was laid at the foot of investing in the future of the business.

Average loans and acceptances grew $6.2B or 3.3% while average deposits grew $7.3B or 5.8%. Personal deposit balances climbed 5% while commercial deposit balances climbed a more impressive 8%. I like the change in commercial deposits…this type of funding is more ‘sticky’ compared to retail or personal deposits. Deposit growth outstripping loan growth led to an improvement in the segment’s loan-to-deposit ratio to 147% from 150% in the year ago period. The segment’s Net Interest Margin (NIM) on average earning assets climbed slightly to 2.61% from 2.6%.

PCL in Canadian P&C fell $20M to $109M (PCL as % of average loans and acceptances was 0.06% versus 0.07% in the year ago period) on account of lower provisions and higher recoveries in the personal business. However, the recent turmoil in financial and commodity markets may see this value climb in the next reporting period.

Adjusted Net Income (adjusted for a small $1M) climbed $31m or 5.8%to $557M.

U.S. PERSONAL & COMMERCIAL BANKING (U.S. P&C, USD$)

Total revenue was flat at $727M versus $728M one year ago. Unfortunately the $10M increase in Non-interest income was mitigated by a $9M fall in Net Interest Income. Disappointing top-line numbers were followed by a $5M or 1% increase in non-interest expenses which lead to negative jaws. The segment’s Adjusted Efficiency Ratio (adjustment mentioned below) fell to 63.9% from 62.6%.

The $2.5B (+4.5%) increase in average current loans and acceptances outstripped the $1.7B (2.8%) growth in deposits…resulting in a loan-to-deposit ratio of 95% versus 94% in the year ago period…a slight deterioration. Loan and deposit performance was mixed in the quarter when compared to last year. Loan growth (dollar value) outstripping deposit growth, unfavorable product mix, and pricing pressure led to a disappointing 17bps fall in NIM t o 3.45%.

The segment’s bright spot for the quarter under review was the $37M decline in PCL due to lower provisions and higher recoveries in the commercial portfolio.

Management is seeking to grow its U.S. business and as such adjustments (amortization of acquisition-related intangible assets) of $11M in the quarter were recorded, resulting in Adjusted Net Income of $186M versus $162M ($12M adjustment recorded in Q3 2014) in the year ago period (+15%).

WEALTH MANAGEMENT

Total revenue fell $172M or 11% due to a large decline in Non-interest income ($1.172B v. $1.367B). Net revenue which nets results of the insurance operations was up $130M or 13% YoY. Traditional wealth revenue increased 12% due to higher fee-based revenues. Revenue from the segment’s insurance business was strong.

There were a few adjustments to be had in the non-interest expenses line relating to M&A activities in the segment. Having said that, the segment’s Adjusted Efficiency Ratio deteriorated slightly to 72.3% from 72.7% in the year-ago period. Management indicated expense growth was revenue-driven and on account of investing in the business…hopefully future revenue growth will be less “expensive”.

AUM rose $30.5B or 8% YoY and AUA rose $72B or 18%. Growth in AUM and AUA was organic with favorable FX movements and market appreciation boosting these numbers. Fund management is a business I like…good margins, “sticky”, fairly stable revenue streams. I wish I could get a better look at how the AUM is broken down between equities and fixed income. I would not be surprised to read about BMO pursuing more deals in this sector.

NIM in this segment rose 9bs to 2.71%,

Adjusted Net Income rose $22M or 10% YoY to $233M.

BMO CAPITAL MARKETS

Total revenue rose $17M or 1.7% to just over $1B; Net Interest Income dropped $20M but Non-interest revenue climbed $37M. Stripping out the benefit of the stronger U.S. Dollar would have seen total revenue decline by about 2%. Management cited lower i-banking activity as a contributor to a smaller top line.

PCL jumped $20M. Non-interest expense rose $34M or 6% due to the stronger U.S. Dollar but fell 1% on a constant currency (CC) basis. Netting CC revenue and CC expenses resulted in small negative jaws.

Adjusted Net Income (small $1M adjustment) fell $31M or 10% YoY to $274M

Overall the numbers were OK given the environment BMO is operating in. Canadian P&C was good but U.S. P&C still seem to be posing a challenge…it will be interesting to see how TD’s U.S. operations fared in the most recent quarter. Capital Markets was expected to show some weakness given the nature of its business but I have high hopes for Wealth Management going forward.

How did you find the results?