BMO road reps may have been too aggressive in bringing in new mortgages during the last quarter, with the bank’s latest financial report pointing to increasingly tight interest margins which squeezed profit.
“P&C (Personal and Commercial) Canada’s margin decrease was primarily due to lower personal lending margins resulting from customer behaviours… in the low rate environments and loan growth exceeding deposit growth, particularly mortgages,” the report said.
Canada’s fourth-largest bank posted a $970 million net profit for Q3 compared to $708 million for the same period last year. The earnings represent a 37 per cent boost from the previous period and increased BMO’s dividend for the first time in five years.
On the flip side, BMO’s recent boost in mortgage originations early this year may have hurt profit as the new loans were acquired at a lower interest rate, even as depositor interest remained relatively stable as an expense.
“BMO's overall net interest margin decreased 1 basis point from the second quarter,” the report stated. “Adjusted net interest margin decreased 6 basis points.”
In May this year, MortgageBrokerNews.ca reported that BMO realized a $6.6 billion increase, year-over-year, in net loans and acceptances for the three months ending April 30. That growth was primarily due to an increase in residential mortgages of $1.2 billion as well as $5 billion in loans for businesses and governments.
That mortgage leap resulted, in part, from the controversial 2.99 per cent five-year fixed BMO re-introduced in March. At that time, the move caught the ire other big banks as well as brokers, many of who were forced to buy down rate in order to keep up with BMO.
Tuesday, BMO said an active housing market in Canada with low interest rates and high consumer debt levels “could imply potential risk” if an economic downturn or increase in interest rates were to occur.
BMO’s Canadian residential mortgage portfolio represents 6.5 per cent of the total Canadian residential mortgage market of $1.142 billion. Approximately 65 per cent of the portfolio is insured with an average loan-to-value ratio of 64 per cent. The remaining 35 per cent of the portfolio is uninsured with a loan-to-value ratio of 56 per cent.