Bank of Montreal Q2 FY2026 earnings call

• Overall Core Performance Progress

  • Delivered strong results in Q2 2026, building on 2025 peer-leading performance (number one ROE and EPS growth) to hit an adjusted ROE of 13.5% (up 370 basis points year-over-year), adjusted EPS of $3.67 (up 40% year-over-year), pre-provision pre-tax earnings (PPPT) of $4.4 billion (up 16% year-over-year), and a record net income of $2.7 billion. Operating leverage came in at a strong 4.1%, and the CET1 capital ratio is a strong 13% (at the higher end of the 12.5%-13% target range).
  • Bought back 6 million shares this quarter and announced a 5% dividend increase to $1.71, and is on track to deliver sustainably higher ROE and reach the 15% ROE target by the end of fiscal 2027.

• Enterprise Strategic Priorities Execution

  1. Grow and deepen client relationships: One-client cross referral strategy delivered tangible results: 74% increase in referral revenue between Canadian commercial banking and wealth management, and over 2,500 new business banking added across Canada and the U.S. year-to-date. Canadian P&C core operating deposits grew 7% (retail) and 8% (commercial) year-over-year, with 18% new client growth in Canadian commercial banking. U.S. core retail operating deposits grew 4% sequentially.
  2. Drive innovation for business value: Launched 24-7 tokenized cash capabilities in partnership with CME Group and Google Cloud to lead in digital finance, established the BMO Institute for Applied Artificial Intelligence and Quantum for responsible scaled AI governance, and ranked first in eMarketer's 2026 Canada Mobile Banking Features benchmark for the third consecutive year.
  3. Optimize performance and capital allocation: Completed the U.S. banking balance sheet optimization program over six quarters with the announced sale of the transportation and vendor finance businesses, expected to close in Q4 2026. The sale is expected to add 28 basis points to CET1, be accretive to ROE by 30 basis points, and free up capital for organic growth in core higher-return markets. The $250 million annualized efficiency program is on track, with half of savings expected to be realized in 2026.

• Key Operational Milestones

  • BMO ETFs had 20 funds recognized in the Globe and Mail's 2026 Best ETFs ranking. Capital markets holds the number one ranking in equity capital markets (ECM) and top investment banking share of wallet in Canada, with growing U.S. M&A activity led by its market-leading metals and mining franchise. U.S. de novo expansion plan will open 1 new financial center per month in Southern California for the rest of 2026, with plans to accelerate openings to ~27-29 per year starting in 2027 as part of a 5-year 150-center expansion target.

1. Canadian Personal and Business Banking (Canadian P&C): Net income increased 15% year-over-year, with pre-provision pre-tax earnings (PPT) up 5% year-over-year. Revenue grew 5%, driven by higher net interest income (NII) from margin expansion and loan growth, plus strong growth in non-interest revenue from higher commercial treasury and payment solutions (TPS) fees, mutual fund distribution fees, and elevated card revenues, partially offset by a retail deposit fee cut this quarter. Expenses grew 5% as growth investments were balanced by cost optimization efforts.
2. U.S. Banking: Net income increased 30% year-over-year, return on equity (ROE) expanded 220 basis points to 9.3%, and the segment delivered a record PPT of $924 million, up 9% year-over-year. Revenue grew 5% on higher NII from margin expansion, partially offset by lower average balances from prior optimization initiatives. Non-interest revenue grew 16% (7% excluding prior year one-time impacts), driven by higher TPS, M&A, and wealth management fees from successful one-client strategy execution. Expenses grew 2%, reflecting growth investments in talent and technology net of cost savings.
3. Wealth Management: Net income increased 39% year-over-year, driven by a 21% increase in record wealth and asset management revenue from market appreciation, strong net sales growth, and balance sheet growth. Insurance revenue grew 27% on higher investment results. Expenses rose 15% driven by higher employee and revenue-based costs.
4. Capital Markets: Net income increased 46% year-over-year, with record PPT of $900 million up 31% year-over-year. Total revenue grew 19%: global markets revenue rose 15% led by higher equities trading revenue (offset partially by lower interest rate trading), while investment and corporate banking revenue increased 26% driven by strong advisory and equity underwriting fees. Expenses grew 11% mainly from higher performance-based compensation.
5. Corporate Services: Reported a net loss of $86 million, an improvement from the prior quarter which was impacted by severance charges and seasonally high expenses.

• Full-year 2026 core expense growth is expected to remain in the mid-single digits, with positive operating leverage to be maintained for the remainder of the year.
• BMO's net interest margin (NIM) is expected to remain relatively stable in the near term: tailwinds from deposit ladder reinvestments and deposit mix optimization will offset pressure from temporary higher low-yielding liquid asset holdings and balance sheet mix changes.
• The company maintains its target of achieving and sustaining a 15% group ROE by the end of fiscal 2027.
• U.S. banking is expected to deliver mid-single-digit full year 2026 loan growth, with continued momentum entering the second half of the year. Canadian commercial banking expects sustained sequential quarter-over-quarter loan growth, with low single-digit growth if macro caution continues, and potential upside if macro conditions improve.
• Total impaired provisions are expected to remain in the mid-40s basis points range over the next two quarters, in line with prior guidance. By the end of 2027, provisions are expected to decline to the mid-30s basis points range.
• Corporate Services full year 2026 net losses are expected to be in a similar range to the past two years, with moderately higher losses in the second half of 2026.

• Macroeconomic and Geopolitical Risks: The Middle East conflict has introduced new global economic risks, including higher oil prices and renewed inflation concerns. The Canadian economic outlook is mixed, with modest near-term GDP growth amid ongoing inflation and unemployment pressures, particularly in consumer segments. The U.S. economy remains resilient but faces ongoing uncertainty from trade policy and geopolitical risk.
• Consumer Credit Risks in Canada: Canadian unsecured consumer credit (particularly credit cards) is seeing upward trending delinquency rates, driven by elevated insolvencies, rising unemployment, and the existing mass-market skew of BMO's card portfolio. Slower immigration has also slowed the planned mix shift to higher-value premium card customers.
• Competition Risks: Both Canadian and U.S. banking markets are highly competitive: Canada faces intense competition for existing clients amid slower immigration-driven growth, while the U.S. faces competitive pressure on deposit pricing.
• Regulatory Risks in Canada: BMO notes that sustained Canadian economic growth requires coordinated cross-government regulatory reform to improve competitiveness; while recent federal reforms are positive, additional alignment is needed to unlock business investment.

Q: Given ongoing softness in Canadian domestic consumer credit, do you expect ongoing deterioration through the second half of 2026, and when might the trend moderate?

A: BMO notes that weakness in Canadian consumer credit is concentrated in the small unsecured portfolio, while the secured mortgage portfolio has low loan-to-value ratios, high average FICO scores, and strong collateral protection. Delinquencies will continue to rise modestly in the unsecured segment, but prior de-risking actions are already taking effect, and pressure on the secured segment is expected to be transitory. Early intervention programs help 9 out of 10 delinquent borrowers self-correct, with recovery rates above 98% for secured loans.

Q: Now that the transportation and vendor finance sale is complete, are there additional U.S. portfolio optimization opportunities left, or is the business mix now aligned with management targets?

A: The six-quarter U.S. balance sheet optimization program is now effectively complete, and the U.S. portfolio is positioned exactly as management expected it would be at this stage. The portfolio is now focused on full client relationships in core regional markets where BMO has a competitive advantage. Free capital generated from the optimization will be deployed primarily to organic growth in these core markets.

Q: Can BMO maintain its historical through-the-cycle quarterly PPPT run rate of ~$750 million for Capital Markets, or is performance proving more durable than originally expected?

A: BMO Capital Markets' strong Q2 performance reflects investments made to broaden product and asset class capabilities, and current deal pipelines for M&A and ECM are very strong. If market conditions remain constructive, the business is positioned to deliver above historical trend line performance. Management notes that activity remains subject to market conditions and has seen modest early moderation, but the outlook remains positive.

Q: Given competitive pressures in both Canada and the U.S., will incremental new growth be sub-15% ROE, and what is the ROE dynamic for new growth across both markets?

A: BMO is highly selective for new business growth in both markets, and all net new lending is required to clear the 15% ROE hurdle. In Canada, growth is focused on full client relationships with higher returns, even as overall loan growth remains modest. In the U.S., post-optimization, BMO is positioned to capture higher quality market share growth that meets ROE targets. Strong 20% year-over-year fee growth also supports overall returns, offsetting any modest NIM pressure from competitive deposit markets.