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Canadians load up on mortgages, cut card dept

Canadians load up on mortgages, cut card debt


BMO chief; Second-quarter profit up 7.5% on lower provisions

Canadian consumers continue to pile on mortgage debt despite repeated warnings that they need to crank back on borrowing if this country is to avoid a painful real estate correction, says the chief executive of Bank of Montreal.

Consumers "have certainly had plenty of opportunity to think about it," Bill Downe said in an interview.

"The governor of the central bank [Mark Carney] has done a good job of sending out cautionary notes and we've put a lot of effort into trying to help people make better decisions."

The good news is that BMO customers are starting to take heed "on the margins" by paying down more on their credit cards. However, growth in the overall home loan market "is continuing to be more robust," Mr. Downe said, adding that BMO's portfolio is growing more slowly than the overall market.

Canada's fourth-largest lender on Wednesday kicked off second-quarter bank earnings season with a 7.5% increase in profit on the back of lower provisions for bad loans.

For the three months ended April 30, BMO had net income of $800-million, or $1.34 a share, up from $745-million ($1.26) in the same period last year.

The bank set aside $145million in provisions for credit losses, down $104-million as more customers repaid their loans.

Since the financial crisis, Canadian banks have been consistently cutting back on credit provisioning, which has helped boost results, and at BMO they're now close to where they were in the latter half of 2007 before the turmoil hit.

"We would characterize this as a solid quarter for BMO," said John Aiken, an analyst at Barclays Capital, who added that earnings quality was "quite high."

The biggest surprise was a $47-million after-tax loss from exposure to the earthquakes in New Zealand and Japan, resulting in net income in the insurance business of just $1million, compared to $43-million in the same period last year.

On a conference call with analysts, BMO executives said natural disasters of such magnitude are rare events and the losses are unlikely to be repeated anytime soon.

The domestic personal and commercial operation, BMO's biggest driver, had a profit of $401-million, up $7-million as strong loan volume growth mostly offset rising expenses.

There is evidence that consumer credit-card balances are declining as bank customers start to heed warnings about taking on too much debt.

On the residential mortgage side, Mr. Downe said he expects to see growth start to "soften" in the coming months.

Mr. Carney has warned several times over the past 12 months that record household debt levels have left this country vulnerable to economic shocks.

The struggling U.S. operation posted net income of $43-million, down $2-million, as the bank set aside higher provisions for bad loans.

Analysts anticipate the Canadian banks will report a slight increase in profit for the quarter as they contend with the impact of declining consumer borrowing, moderating capital markets activity and other headwinds.

With domestic household debt levels hovering close to where they were in the United States prior to the financial crisis, many observers are warning that Canadians need to start paying down debt if the economy is remain on level footing.