November 25, 2008 / 1:15 PM / 9 years ago

UPDATE 5-Bank of Montreal profit up; dividend growth on hold

*EPS C$1.06 vs C$0.87 a year earlier

*Tax recoveries, domestic unit help results

*Says dividend growth not appropriate now

*Stock ends up 2.4 pct after initial surge (Adds CEO comments, preferred share issue, closing stock price)

By Lynne Olver

TORONTO, Nov 25 (Reuters) - Quarterly profit rose 24 percent at Bank of Montreal (BMO.TO), helped by tax recoveries, higher profit at its Canadian retail banking unit and new accounting rules, but the bank said on Tuesday that dividend increases are on hold because of the murky economic outlook.

Analysts were split on whether the bank beat or missed profit expectations, but several said the numbers were sufficiently solid to relieve investors.

The market had worried about large writedowns after bigger competitors Royal Bank of Canada (RY.TO) and Toronto-Dominion Bank (TD.TO) warned they would take quarterly charges for securities and trading losses.

BMO also announced a C$150 million ($122 million) preferred share issue on Tuesday afternoon, the third equity financing by a Canadian bank this week as financial institutions put greater emphasis on higher capital levels because of the financial crisis.

Keeping “elevated levels of capital” is appropriate in this environment, and growth in the bank’s dividend is unlikely, BMO President and Chief Executive Bill Downe told a conference call.

The bank’s C$2.80 per share annual dividend put it above the target payout ratio of 45 percent to 55 percent of earnings in the fourth quarter, so growth in the dividend is “not appropriate,” Downe said.

But the current dividend level is suitable because of the bank’s earning power, he added.

BMO’s dividend yield has ballooned to 8 percent as the stock price has fallen.

Canada’s fourth-largest bank said that net income was C$560 million, or C$1.06 a share, in the three months ended Oct. 31.

That was up from a profit of C$452 million, or 87 Canadian cents a share, a year earlier, when the bank swallowed charges for commodities and capital-markets losses.

Adjusting for “a ton of moving parts,” the bank’s results fell shy of expectations, said Brad Smith, an analyst at Blackmont Capital. He pegged the “core” operating earnings at 97 Canadian cents a share, once tax recoveries and other items are excluded.

But others, including Dundee Securities’ John Aiken, said the results beat expectations, if stripped of items including an increase in the bank’s general allowance for credit losses.

Analysts had expected profit of C$1.08 a share before items, according to Reuters Estimates.

BMO said it transferred C$2 billion in securities from its trading portfolio to the “available for sale” category, allowing it to avoid C$123 million in valuation charges that would have hurt income under previous accounting rules.

ACCOUNTING FLEXIBILITY

Most Canadian banks, except for Bank of Nova Scotia (BNS.TO), have availed themselves of this recent accounting flexibility, Smith said.

That means they diverted unrealized mark-to-market losses from the bottom line, he said.

“While they divert (losses) this quarter, if there’s no sign of recovery in those values next year, then impairment charges will have to be made.”

BMO did take charges of C$45 million, or C$27 million after tax, in its BMO Capital Markets and Private Client Group for various securities writedowns and an offer to repurchase US$143 million worth of auction rate securities from clients.

The bank set aside more money for loan losses. These provisions tripled from a year earlier to C$465 million in the fourth quarter, but were down slightly from the previous quarter.

The bank said its Tier 1 capital ratio -- a measure of capital strength that investors are closely watching these days -- was strong at 9.77 percent.

Andre-Philippe Hardy, an analyst at RBC Capital Markets, said that BMO’s capital ratios were better than he had estimated, but noted that credit losses could be high in 2009.

In BMO’s profit engine -- the Canadian retail banking unit -- quarterly profit jumped 19 percent from a year earlier to C$344 million, as personal banking and cards revenue increased.

Bank of Montreal shares closed 2.4 percent higher at C$34.95 on the Toronto Stock Exchange on Tuesday. ($1=$1.22 Canadian) (Reporting by Lynne Olver; editing by Peter Galloway)

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