Bank of Montreal’s chief executive Darryl White says economic growth in Canada is “moderating” but it’s “no screeching halt” and the risk of a recession in the coming year is relatively low.
White said Tuesday he estimates that by the back end of this year, the country’s GDP growth will be in the range of 1.5 per cent.
“Are we experiencing some slowdown? Yes, but let’s pay attention to the rate of change… It’s moderating, it’s not a screeching halt,” he told reporters after BMO’s annual meeting of shareholders.
“And when we look at employment rates, we look at inflation, they don’t line us up to driving ourselves towards a recession.”
White’s comments come after an analyst and short sellers recently heeded caution about the Canadian banking sector.
Veritas analyst Nigel D’Souza said in late March that the Big Six banks’ latest quarterly earnings were “underwhelming” and cautioned that the sector is likely facing an “inflection point” in the credit cycle. He said investors should reduce exposure ahead of “an acceleration of credit losses.”
As well, Steve Eisman, a senior portfolio manager at Neuberger Berman in New York, who was featured in the book and film The Big Short, recently reiterated his bet against the big Canadian banks, pointing towards the real estate sector.
On Tuesday, White told shareholders and other annual meeting attendees that while BMO has seen some moderation in Canadian consumer loans and mortgages, this was both “healthy and expected” and credit quality continues to be “very good” in these consumer portfolios.
While the performance of each housing market in Canada varies, there continues to be net growth, White told reporters.
He said British Columbia, Saskatchewan and Alberta are seeing some weakness, while Toronto’s market is “steadying” and the markets in Southern Ontario outside of Toronto, along with Ottawa and Montreal, are strong.
“You really have a diverse set of circumstances when you go across the country… On a blended basis across Canada, are we going to see a slowing consumer mortgage portfolio? For sure, relative to what we would have seen last year or the year before. But still growing,” White told reporters.
In response to the rising rhetoric targeting Canadian banks and the real estate sector, White noted that BMO’s mortgage book is 44 per cent insured, and the uninsured portion has a more than 50 per cent loan-to-value ratio. And, among its peer group, BMO has the lowest exposure to the Canadian housing market, he added.
“I don’t lose sleep over this question, personally… I think the market is a lot healthier than some people think it is.”
Overall, White said while expansion of the U.S. and Canadian economies has “slowed somewhat,” as interest rates and low inflation persist, the bank is continuing to experience growth.
He added in his speech that BMO remains confident in its medium-term target of earnings-per-share growth of seven to 10 per cent.
In particular, the lender is continuing to benefit from its U.S. businesses, which over the last 12 months have accounted for 30 per cent of the bank’s total earnings, White said in his speech.
It’s a percentage that Canada’s fourth-largest lender by market value expects to be “steadily increasing.”
“We currently have only a very small share of the overall U.S. market… I like the way that opportunity looks for us,” he told shareholders.
Since 2012, the bank’s U.S. segment has had a compound annual earnings growth rate of 17 per cent, largely organic growth, he added.
BMO has a strong presence in the U.S. Midwest, reflecting its acquisition of Chicago-based Harris Bankcorp in 1984 and Milwaukee-based Marshall & Ilsley in 2011.
White said Tuesday BMO is leveraging its U.S. position to continue growing, noting that roughly 50 per cent of the business comes from its core seven-state footprint anchored in the Midwest and the other half from elsewhere in the country.
“There’s perhaps an impression that we’re over indexed … to the Midwest,” he told reporters. “That’s not the case.”
He anticipates broader growth from BMO’s U.S. commercial business, which he said was “very scaleable,” as well as its wealth and capital markets divisions south of the border.
“This isn’t saying we’re going to be all things to all people in all geographies in the United States,” White told reporters.
Although a U.S. bill that would allow banks to serve cannabis companies in states where legal is working its way through the legislative process, White said the bank will evaluate an expansion of its cannabis business south of the border once pot is federally legalized there.
“If we get through to the end of federal legislation, that’s permissive, we’ll look at it then,” he said. “But we have nothing in our business plans today that is dependent on pushing our cannabis business into the United States.”
Armina Ligaya, The Canadian Press