August 24, 2010 / 11:48 AM / 7 years ago

UPDATE 4-BMO profit short of expectations, bank shares drop

* EPS misses estimates on weak trading income

* Loan loss provisions C$214 mln vs C$417 mln year earlier

* Shares fall 6 percent, other banks drop (Adds details from conference call, updates shares)

By Cameron French

TORONTO, Aug 24 (Reuters) - Bank of Montreal’s BMO.TO profit rose 20 percent in its third quarter as it set aside much less money for bad loans, but the result missed expectations due to weak trading income, pulling the bank’s shares down 6 percent on Tuesday.

The bank’s earnings miss, the first result from Canada’s big six banks for the latest quarter, also pressured the shares of the other banks on concerns that trading results will miss expectations when they post quarterly results this week and next.

“We’ll have to see what the rest of the banks do, but they probably will follow this pattern somewhat,” said John Kinsey, a portfolio manager and Caldwell Securities in Toronto.

Canada’s No. 4 bank earned C$669 million ($630 million), or C$1.13 a share, in the period ended July 31, up from C$557 million, or 97 Canadian cents a share, a year earlier.

The profit missed analysts expectations of C$1.21 a share, according to Thomson Reuters I/B/E/S, as weak markets hit brokerage results.

Profit at BMO Capital Markets, the bank’s brokerage wing, fell 58 percent to C$130 million.

“We were looking for a decline, but a smaller decline,” said Robert Sedran, an analyst at CIBC World Markets.

Analysts had expected a retreat in markets-related revenue as economic uncertainty and the aftershocks of Europe’s debt crisis have pulled both stock prices and bond yields lower, dampening trading activity.

BMO’s stock ended down C$3.56 at C$55.50 on the Toronto Stock Exchange, while Royal Bank of Canada RY.TO and National Bank of Canada NA.TO both fell 3.1 percent.

The TSX financials sector .SPTTFS slid 2.9 percent.

LOAN LOSSES DIVE

BMO’s core Canadian branch banking business -- its largest segment -- showed a 17 percent rise in income to C$426 million, while profit at its U.S. franchise, based in the Chicago area, retreated 27 percent to C$38 million.

The U.S. banking industry has been slow to recover from the financial crisis. Royal and Toronto-Dominion Bank TD.TO also have substantial U.S. retail banking franchises.

Provisions for bad loans fell to C$214 million from C$417 million as a year-over-year economic improvement led to fewer defaults.

“Loan losses were better than expected, net interest income was better than expected, so the result wasn’t a disaster,” Sedran said. “It was really all about trading.”

Tier 1 capital ratio, a measure of financial stability, was 13.55 percent, up from 11.71 percent a year before.

CLARITY ON DIVIDENDS

Despite the trading disappointment, the increased capital levels and improvement in retail revenues had analysts on a conference call with BMO management wondering when the bank might resume dividend hikes.

BMO last raised its quarterly payout in 2007, and like other lenders, it has been waiting for clarity on new capital and regulatory standards to be released by the Basel banking committee later this year before it makes big spending moves.

The new rules, which will government how much and what type of capital banks must hold, are part of an effort to avoid a repeat of the financial crisis.

BMO Chief Executive Bill Downe said he expected regulatory certainty to return over the next year but stopped short of putting a time frame on possible dividend hikes.

Still, he said recent signals indicate that new regulations -- which will include specific levels for how much and which type of capital banks must hold -- will not put a strain on the bank.

“Based on what we know and the work we’ve done to date, we’re well positioned on both an absolute and relative basis, to adopt the new rules,” he said on the call.

Getting clarity on new regulations would also allow BMO to consider acquisitions. The bank is looking to grow its presence in the U.S. Midwest.

Canadian Imperial Bank of Commerce CM.TO will release its quarterly results on Wednesday, while Royal and National Bank will report on Thursday.

$1=$1.06 Canadian Reporting by Cameron French; Editing by Frank McGurty

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