This Canadian bank aims to bolster growth with cannabis industry lending

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Cannabis-Connected

One of Canada’s largest banks is going against the grain and making loans to Canadian cannabis companies. When it’s legal, it will also consider lending to U.S. cannabis companies.


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BANK OF MONTREAL $102.19 (Toronto symbol BMO; Shares outstanding: 638.4 million; Market cap: $65.2 billion; www.bmo.com) is Canada’s fourth-largest bank, with assets of $806.6 billion.

Most of Canada’s big banks have avoided lending funds to companies in the cannabis industry. That’s mainly due to fears that those loans could hurt their U.S. operations, where cannabis is still a prohibited substance at the federal level.

However, Bank of Montreal continues to lend money to licensed cannabis producers in Canada. For example, it recently provided $39 million in financing to WeedMD Inc. (TSX Venture Exchange symbol WMD).

WeedMD will use those funds to help pay for its $22.6 million purchase of a 98-acre cannabis-production facility in Strathroy, Ontario. It also has a second facility in Aylmer, Ontario.

As well, Bank of Montreal has provided a $30 million credit facility to Sundial Growers Inc., which produces cannabis at two facilities in Alberta.

The bank may be also willing to lend to U.S. cannabis producers if federal legislation makes it possible.

Meantime, in its fiscal 2019 first quarter ended January 31, 2019, Bank of Montreal earned $1.54 billion. That’s up 8.2% from $1.42 billion a year earlier. Due to fewer shares outstanding, earnings per share rose at a faster rate of 9.4%, to $2.32 from $2.12.

The latest results exclude unusual items, most notably a gain related to changes for its employee benefit plan. On that basis, the earnings beat the consensus estimate of $2.23 a share.

Earnings from Canadian retail banking (40% of the total) rose 0.3%, as higher interest rates and loan balances offset rising non-interest expenses and credit provisions. U.S. retail banking (28%) saw its profits jump 32.8%, on strong loan demand and rising deposits. The recent U.S. tax cuts also contributed to the improved results.

Profits for the bank’s wealth management business (16%) fell 9.8%, as the drop in stock markets (during the quarter) hurt the value of its assets under administration. As well, earnings at the capital markets operations (16%) slipped 3.3% on higher operating expenses and lower trading volumes.

Bank of Montreal’s overall revenue rose 6.0%, to $5.59 billion from $5.28 billion a year earlier. Loan-loss provisions fell 2.8% in the quarter, to $137 million from $141 million. The decline reflects higher recoveries on U.S. loans that had previously been written off.

Bank of Montreal is a buy.

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