Bank of Montreal's Q3 2025 Earnings Call: Contradictions Emerge on U.S. Loan Growth, Macroeconomic Uncertainty, and Credit Risk

The above is the analysis of the conflicting points in this earnings call

Date of Call: August 26, 2025

Financials Results

• Revenue: Revenue up 10% YOY
• EPS: Adjusted EPS $3.23, up 22% YOY (reported EPS $3.14)

Guidance:

- All-bank NIM ex-trading expected to remain stable in Q4, aided by disciplined deposit management and asset mix.- Typical Q4 sequential expense uptick anticipated; commitment to positive operating leverage maintained.- Corporate Services loss expected to be moderately higher next quarter.- Credit outlook: impaired PCLs have moderated; prior guidance of high-40 bps total PCLs unchanged; continued normalization expected.- Medium-term ROE targets reaffirmed: 15% all-bank; 12% U.S. P&C (unchanged after combining U.S. Wealth with P&C starting Q4).- CET1 at 13.5%; intends to initiate a new NCIB for up to 30M shares, pending approval.

Business Commentary:

Earnings and Revenue Growth:* - BMO reported a record net income of $2.4 billion for Q3 2025, the highest on record, with earnings per share increasing by 22% to $3.23. - This growth is attributed to strong contributions from every operating group, including U.S. P&C improvement, credit management, and capital optimization initiatives.

• Credit Performance and Provisioning:
• The total provision for credit losses was $797 million, with impaired provisions at $773 million, reflecting stability compared to the prior quarter.

• Impaired formations were $1.8 billion, stable relative to the previous quarter, indicating a positive trend despite ongoing trade-related uncertainties.

• Operating Leverage and Efficiency:

• BMO achieved positive operating leverage of 4.7% year-to-date, with a 6th consecutive quarter of positive leverage.

• This was driven by a focus on disciplined expense management and leveraging digital and AI capabilities to improve operational efficiency.

• Strategic Acquisitions and Structure Changes:

• BMO announced the acquisition of Burgundy Asset Management to expand wealth management capabilities, aiming to enhance its wealth and financial planning offerings.
• This follows organizational changes in the U.S. banking segment, combining Personal and Business banking, Commercial, and Wealth management under the leadership of Aron Levine.

  Sentiment Analysis:

  • “EPS increased 22% to $3.23 and net income of $2.4B was the highest quarter on record.” “PPPT…up 13%” and “Total PCL decreased $109M from the prior year.” “Return on equity improved to 12% for the quarter.” “We’ve now delivered positive operating leverage for 6 consecutive quarters…4.7% YTD.” CET1 “13.5%…we completed 6M share repurchases…intend…NCIB…up to an additional 30M shares.”

  Q&A:

  • Question from Gabriel Dechaine (National Bank Financial): What is the updated U.S. loan/revenue growth outlook amid macro changes and balance sheet optimization (including any business exits like Transportation Finance)?
  • Response: Management views this as a short-term reset: optimizing low-ROE assets while originations rise; expect to grow at market or better as conditions improve into late 2025/2026.
  • Question from Gabriel Dechaine (National Bank Financial): Does moving U.S. Wealth into U.S. P&C raise the 12% ROE target?
  • Response: No; the 12% U.S. P&C ROE target remains unchanged given Wealth’s small earnings contribution.
  • Question from Matthew James Lee (Canaccord Genuity): Does the U.S. performing reserve release signal a more positive U.S. outlook and potential further releases?
  • Response: Yes; better U.S. macro and faster credit stabilization drove the release, partly offset by a Canada build; further releases depend on conditions.
  • Question from Matthew James Lee (Canaccord Genuity): Have U.S. impaired PCLs peaked?
  • Response: Likely yes; portfolio is stabilizing with possible quarter-to-quarter variability.
  • Question from Ebrahim Huseini Poonawala (BofA Securities): How do you view Canada’s macro and credit outlook amid tariff uncertainty?
  • Response: Canada is in modest 1–1.5% growth, not recessionary; 2026 outlook hinges on trade/policy execution, with potential upside if actions follow.
  • Question from Ebrahim Huseini Poonawala (BofA Securities): What bridges U.S. P&C ROE from ~8.7% toward 12%+ and does it require investment?
  • Response: Focus on sustainable, profitable loan/deposit growth via unified businesses, tech/branch/talent investments, and deeper enterprise cross-sell.
  • Question from John Aiken (Jefferies): What drove the uptick in Canadian CRE formations—single credit or broader?
  • Response: Primarily one developer across multiple projects; portfolio remains diversified with resolutions progressing and some positive updates.
  • Question from Doug Young (Desjardins Capital Markets): Are PCLs at or near peak and set to improve over the coming year?
  • Response: Impaired PCLs have fallen to 45 bps from 66 bps peak; near term, total PCLs likely around current levels given macro, with better visibility next quarter.
  • Question from Paul David Holden (CIBC Capital Markets): Is strong YTD operating leverage pulling forward future benefits, or can 2 pts/year persist?
  • Response: No pull-forward; management remains committed to ongoing positive operating leverage and further efficiency gains toward 15% ROE.
  • Question from Mario Mendonca (TD Securities): What uncertainty remains and is U.S. portfolio optimization a reaction to PCLs or ROE-driven?
  • Response: Uncertainty has eased vs early 2025 but persists; optimization is ROE-driven with intentional exits and expected return to market/above-market growth by late 2025/2026.
  • Question from Shalabh Garg (Veritas Investment Research): What drove higher credit RWA and any sector concentration?
  • Response: Slight increase stemmed mainly from residual negative credit migration despite some mix/tenor benefits; no single sector dominates.