BMO Financial Group (BMO) Q1 2026 earnings review
Credit Normalization Drives EPS Beat, but Operating Leverage Reverses
BMO Financial Group kicked off fiscal 2026 with a solid beat, delivering $9.84B in adjusted revenue (+6.2% YoY) and adjusted EPS of $3.48 (+14.5% YoY). The core growth engine is firing through a decelerating Provision for Credit Losses (PCL), which dropped 26% YoY to $746M, directly boosting bottom-line profitability. However, the narrative of structural efficiency championed in FY25 hit a snag: adjusted expenses grew 9.0% YoY, outpacing revenue growth and reversing the trend of positive operating leverage. While Capital Markets and Canadian P&C posted strong gains, a sequential decline in U.S. Banking profit indicates the ROE rebuild strategy still faces execution friction.
🐂 Bull Case
Provision for Credit Losses decelerated significantly to $746M from the $1.01B peak a year ago. This steady normalization indicates the worst of the credit cycle, particularly in U.S. Commercial portfolios, may be largely in the rearview mirror.
Adjusted revenue growth accelerated to 6.2% YoY (up from 4.2% in Q4), driven by a strong rebound in non-interest revenue ($4.19B, up 8.5% YoY) and steady net interest income expansion.
🐻 Bear Case
Management's strict commitment to positive operating leverage failed this quarter. Adjusted non-interest expenses grew 9.0% YoY ($5.69B), heavily outpacing the 6.2% revenue growth and squeezing structural margins.
Despite massive balance sheet optimization efforts in FY25, U.S. Banking adjusted net income reversed its sequential climb, dropping 8% QoQ to $802M.
⚖️ Verdict: 🟢
Bullish. The 14.5% YoY EPS growth is highly compelling, primarily driven by the de-risking of the loan portfolio and falling PCLs. If BMO can rein in expense growth in the coming quarters, the path to their 15% ROE target remains viable.
Key Themes
Provision for Credit Losses (PCL) Normalization
A massive tailwind for earnings: Total PCL decelerated to $746M in 26Q1, a stark 26% drop from $1.01B in 25Q1 and slightly lower than 25Q4 ($755M). This steady decline proves that the proactive performing allowances built throughout FY25 are absorbing stress, allowing credit costs to trend back toward historical averages and boosting net income directly.
Capital Markets Accelerating
The Capital Markets segment remains a potent growth engine. Adjusted net income hit $660M in 26Q1, accelerating 11.3% YoY and jumping 23% sequentially from 25Q4 ($536M). This indicates robust trading, advisory, and underwriting activity, offsetting slower traditional commercial loan demand.
Expense Growth Breaks Positive Operating Leverage Streak
In a direct contradiction to management's FY25 pledge of structural cost reduction and sustained positive operating leverage, 26Q1 adjusted non-interest expenses surged 9.0% YoY to $5.69B. With adjusted revenue only growing 6.2%, operating leverage reversed into negative territory. Achieving the guided 'mid-single-digit core expense growth in 2026' will now require aggressive cost containment in the remaining three quarters.
U.S. Banking Recovery Reverses Sequentially
The U.S. Banking segment, the centerpiece of BMO's 15% medium-term ROE strategy, hit a speed bump. After climbing to $871M in adjusted net income in 25Q4, earnings reversed course and dropped 7.9% sequentially to $802M in 26Q1. This highlights the difficulty of driving organic growth following the aggressive shedding of non-strategic loans.
Stable Net Interest Income Under New Reporting Lens
Adjusted Net Interest Income (NII) reached $5,643M, accelerating 4.5% YoY. Notably, management altered the reporting structure this quarter to exclude Global Markets and Insurance from the Net Interest Margin calculation, stripping out trading volatility and presenting a clearer, stable picture of core lending spreads.
Macroeconomic & Tariff Overlays Remain Unresolved
Throughout late FY25, management explicitly highlighted trade and tariff uncertainty as a primary risk to the Canadian and U.S. commercial macro outlook. With Canadian GDP growth projected at a modest 1.4% and elevated unemployment stressing unsecured consumer portfolios, the broader economic environment remains fragile. Any sudden implementation of strict cross-border tariffs could quickly reverse the current stabilization in PCLs.
AI-Powered Productivity Deployments
BMO continues to lean into technology innovation to drive long-term efficiency. Management previously noted the rollout of GenAI productivity tools (including digital assistants Lumi and Rover) to over 80% of active employees, alongside joining the IBM Quantum network. These digital investments are critical to normalizing the currently elevated expense run-rate.
Other KPIs
Stable sequentially compared to $400M in 25Q4, but up a healthy 15.8% YoY from $328M in 25Q1. This segment continues to provide a high-ROE anchor to the broader business, shielding the bank from purely spread-based revenue volatility.
Reversing. Calculated via adjusted expenses ($5,691M) over adjusted revenue ($9,840M). This is an erosion from the 56.3% reported in 25Q1, driven entirely by the 9.0% surge in adjusted non-interest expenses.
Guidance
Management previously guided to mid-single-digit core expense growth for FY26. With Q1 printing at 9.0% YoY growth, this metric will require significant deceleration across Q2-Q4 to achieve the annual target. The likelihood of achievement is at risk without strict near-term cost containment.
Reversing. BMO successfully delivered 4% positive operating leverage in FY25. The Q1 result of negative leverage (-2.8% spread between revenue and expense growth) puts this core management commitment in immediate jeopardy.
Stable. The $746M total PCL result in Q1 strongly supports the likelihood of achieving this guidance, confirming management's view that credit stress peaked in mid-2025.
Key Questions
Drivers of Negative Operating Leverage
Adjusted non-interest expenses grew 9% YoY, breaking the streak of positive operating leverage. What were the specific components of this spike, and what near-term levers will you pull to ensure you hit your mid-single-digit expense growth guidance for the full year?
U.S. Banking Sequential Decline
U.S. Banking adjusted net income fell 8% sequentially. With the bulk of the non-strategic loan exits completed in FY25, what caused this sequential contraction, and when should we expect organic loan growth to visibly drive the bottom line upward?
Tariff Overlays in Performing PCLs
Given the recent shifts in U.S. political rhetoric regarding trade tariffs in early 2026, have you recalibrated the judgmental overlays on your performing allowance, or do the allowances built in Q2-Q4 of 2025 still sufficiently cover these macro scenarios?