March 4, 2008 / 1:47 PM / in 10 years

BMO profit hit hard by credit charges, provisions

QUEBEC CITY (Reuters) - Bank of Montreal’s (BMO.TO) first-quarter earnings fell a steeper-than-expected 27 percent, hurt by a double-whammy of capital market-related writedowns and soaring provisions for bad loans, the bank said on Tuesday.

BMO’s stock fell as much as 4.9 percent on the Toronto Stock Exchange after Canada’s fifth-biggest bank also warned it would not meet some of the 2008 financial targets it set just three months ago, including earnings growth of 10-15 percent.

“It is very notable that they said they are going to miss their provisions guidance for the year and earnings target guidance for the year,” said National Bank Financial analyst Robert Sedran.

BMO’s stock ended down C$1.47 at C$46.89, its lowest level in almost five years.

It has plunged 17 percent so far this year, the worst performance among Canada’s banks, after falling 18 percent last year when BMO suffered heavy natural gas trading losses.

Those losses coupled with the credit market problems it has faced more recently have led investors and analysts to question whether BMO has lost its mantle as Canada’s most conservative bank, a view that the bank rejected.

“We have not changed the people in the key credit-granting jobs in the company and we haven’t changed the discipline,” said BMO President and Chief Executive Bill Downe.

Asked if the bank was considering cutting its dividend or issuing shares to shore up capital, Downe said on a conference call: “It’s not something that we have contemplated.”

The bank said it earned C$255 million ($258 million), or 47 Canadian cents a share, in the three months ended January 31. That compares with net income of C$348 million, or 67 Canadian cents a share, in the same period a year earlier.

Earnings were chopped by capital market-related writedowns and higher provisions for credit losses.

The capital-markets charges alone were C$488 million, in line with the C$490 million BMO had warned about on February 19. They included losses on positions related to bond insurer ACA Financial Guarantee Corp. and other credit market charges.

Excluding its writedowns, net income was C$617 million, or C$1.19 a share, well below analysts’ average forecasts of C$1.38, partly because of higher loan loss provisions.

Provisions for credit losses soared to C$230 million from just C$52 million a year earlier, largely because of tougher conditions in the United States, especially in areas such as real estate development.

“Canada is actually not too bad. I expect (some deterioration) may start to surface in the back half of the year,” Chief Risk Officer Bob McGlashan said.

Specific provisions for credit losses doubled to C$170 million in the first quarter, a level the bank said is likely to be repeated in quarters for the rest of the year.

BMO gave little new information on the future of two troubled asset-backed commercial paper trusts to which it is exposed, Apex and Sitka, but repeated a warning that it could face a further writedown of about C$500 million in the second quarter if ongoing restructuring talks do not succeed.

“The talks are advanced,” Downe told reporters, but there is no absolute deadline for a resolution.

Late on Monday rating agency DBRS put the two BMO-sponsored trusts on ratings watch with negative implications. DBRS had downgraded them last week to one notch above default.

The bank provided more information on other investments that have worried the market.

It said its investment in ABCP of six BMO-sponsored Canadian securitization conduits had plummeted to C$1.8 billion as of January 31, from C$5.9 billion at October 31, 2007.

The bank also agreed to provide liquidity support facilities to a U.S. ABCP conduit called Fairway Finance Co LLC.

At a news conference after the bank’s annual meeting in Quebec City, Downe said there is now no appetite for certain credit-market securities, even if the underlying assets are of high quality.

BMO also holds C$302 million worth of nonbank sponsored ABCP that is part of a broader Canadian restructuring effort called the Montreal Accord. BMO repeated that it is “fully supportive” of that restructuring, due to conclude in April.

Within BMO’s various units, net income at the bank’s Canadian retail bank rose 1.7 percent to C$302 million.

Net income at its U.S. retail operations, centered around Chicago-based Harris Bank, rose 5.2 percent to US$26 million.

In its private client group, net income increased 7.6 percent to C$98 million. But BMO Capital Markets, which shouldered the credit-related writedowns, lost C$34 million versus a net loss of C$20 million a year earlier.

($1=$0.99 Canadian)

Additional reporting and writing by Nicole Mordant; Editing by Peter Galloway

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