January 22, 2025
In 2023, the Bank of Montreal (BMO) experienced its weakest fundamental performance in the past decade. However, as we entered the 2024 fiscal year and saw a decline in interest rates, key financial indicators displayed notable recovery. For instance, the return on equity (ROE) improved significantly from 6.2% to 9.7%. Additionally, earnings per share (EPS) surged from CAD 5.77 to CAD 9.52, while net income before tax increased from CAD 5,947 million to CAD 9,535 million. These developments reflect a positive trend for BMO, indicating a possible turnaround as the bank adapts to changing market conditions.
With the current interest rate at 3.25%, forecasts indicate that Canada’s rate will drop to 2.00% by the end of 2025, leading to an average rate of approximately 2.88%. This shift is likely to have varying effects on the Bank of Montreal’s (BMO) fundamentals. Notably, fixed-rate loans account for 69% of BMO’s total loans (see the table below). Given this structure, the anticipated decline in deposit expense rates is expected to outpace the reduction in loan income rates, suggesting that BMO’s overall performance may improve as a result.
Is there a concern regarding deposit withdrawals due to declining interest rates?
Currently, 52% of BMO’s deposits are available for short-term withdrawal. While the remaining 48% (C$473,508 million) have fixed-date contractual terms, a substantial portion (C$423,620 million) will mature by the end of the fiscal year. Although such a massive withdrawal seems unlikely, BMO’s assets and liabilities are well-diversified, enabling the bank to manage this situation effectively. Based on the contractual maturities of its assets and liabilities, along with its cash flow management, BMO has sufficient resources—including loans, cash, and securities—to address potential challenges.
As a historical case, the collapse of Silicon Valley Bank (SVB) in 2023 serves as a cautionary tale about the risks of deposit withdrawals. During this crisis, SVB experienced a catastrophic run on its funds largely because it had invested the majority of its deposits in long-term (held-to-maturity) securities. These investments are highly sensitive to interest rate changes and are challenging to liquidate. When the bank faced regular cash demands in a rising interest rate environment, it was forced to sell these HTM securities at a significant loss, leading to a negative financial position. Consequently, anxious depositors withdrew their funds in large numbers, exacerbating the crisis.
Jolan Financial Analysis Inc.