"If oil prices remain depressed, there will be some strain on some of these loans," BMO's chief risk officer, Surjit Rajpal, said during a conference call Tuesday following the release of the bank's fourth-quarter earnings.
"Nothing to worry about today but it all depends on how long the prices remain low."
Oil prices have tumbled about 35 per cent from mid-summer highs due to lower demand, a higher U.S. dollar and, mostly, a glut in global supply.
Barclays analyst John Aiken said that BMO is downplaying the potential impact of lower oil prices, but noted that given the importance of energy to the Canadian economy they are likely to have an impact on both the quality of the bank's loans and its investment and corporate banking revenues.
BMO reported lower than expected earnings as it was hit by weaker revenue in its capital markets division, raising concerns for the rest of the big Canadian banks.
The results from BMO's investment and corporate banking business were the weakest they have been in two years, with advisory fees, trading and commissions all down, Aiken noted.
"If BMO's results translate to the other banks, it's a headwind for all, but more so for Royal (Bank) and National (Bank)," he said.
Royal Bank (TSX:RY) and National Bank (TSX:NA) have some of the highest exposure to capital markets — over 20 per cent of their revenue.
Royal Bank will report its earnings on Wednesday, followed by Toronto-Dominion Bank (TSX:TD) and Canadian Imperial Bank Of Commerce (TSX:CM) on Thursday. The Bank of Nova Scotia (TSX:BNS) and National Bank report Friday.
BMO, the first of Canada's big banks to report its fourth-quarter results, said it earned $1.070 billion or $1.56 per share in the fourth quarter of its 2014 financial year, compared with $1.074 billion or $1.60 per share a year earlier.
On an adjusted basis, BMO earned $1.111 billion or $1.63 per share — five cents below analyst estimates of $1.68 per share but up $23 million or two per cent from a year earlier.
Revenue was $4.34 billion for the three months ended Oct. 31, up from $4.138 billion in the fourth quarter of 2013. Analysts had estimated $4.34 billion of revenue, according to data compiled by Thomson Reuters.
BMO also raised its quarterly dividend Tuesday by two cents to 80 cents per common share.
Shares in the bank closed down $1.87 at $81.42 on the Toronto Stock Exchange.
BMO Capital Markets earned $191 million in net income, down 12 per cent from a year earlier. The bank said higher revenue in that segment was more than offset by higher expenses and lower loan recoveries.
However, the bank's U.S. operations posted strong results, with loan growth outpacing its American rivals, Aiken said.
"They've been gaining market share," he said.
BMO's U.S. personal and commercial business earned US$152 million in net income and US$163 million in adjusted earnings, both up US$54 million from a year before.
The bank's U.S. operations also benefited from the foreign exchange rate and from the integration of Marshall & Ilsley, acquired several years ago.
"We're starting to see the fruits of their labour — of what BMO has accomplished in the U.S. with that integration," Aiken said.
BMO said its main Canadian banking operations showed strong performance, with net income and adjusted earnings up about 14 per cent over the same time last year, but Aiken says there are signs that domestic loan growth is beginning to slow.
BMO's Canadian personal and commercial segment reported $524 million in net income, up $66 million from a year earlier, while adjusted net income was $526 million, up $65 million. The growth was driven by higher revenue and lower provisions for credit losses, partially offset by higher expenses.
Domestic retail banking — and in particular consumer borrowing — has been the banking sector's "earnings engine" for the last three years, said Aiken. Now, with households looking to reduce their debt loads, loan growth is expected to slow.
BMO's chief executive officer Bill Downe said the year ahead contains "both opportunities and challenges" for the bank.
"The progress we've made in 2014 and the momentum across our operating groups gives me confidence looking forward," Downe said during the conference call. "We have an advantaged business mix, geographic diversification and a workforce with a deeply ingrained commitment to customers, all of which provide attractive opportunities to growth."
BMO's wealth management segment earned $226 million in net income, down from $311 million a year earlier. On an adjusted basis, wealth management earned $253 million — down from $318 million a year ago when the bank had a $121 million after-tax security gain.
A legal settlement in the wealth management division cost the bank just under four cents per share, Aiken said.