August 26, 2008 / 12:27 PM / in 10 years

UPDATE 3-Bank of Montreal loan-loss provisions jump

(Adds analyst comment, updates stock price)

By Lynne Olver

TORONTO, Aug 26 (Reuters) - Bank of Montreal (BMO.TO) reported a bigger-than-expected 21 percent fall in quarterly profit as provisions for credit losses rose more than analysts had forecast and Canada’s fourth biggest bank took more charges on the declining value of credit-related securities.

BMO’s stock was down 1.3 percent in morning trading on Tuesday, and Dundee Securities downgraded the stock to a “sell”, citing disappointing results.

“I’m fairly encouraged by what they managed to do domestically, but they can’t get out of the cloud of their capital markets businesses,” said Craig Fehr, an analyst at Edward Jones. “Unfortunately BMO couldn’t escape the writedown story again this quarter.”

The bank earned C$521 million ($494 million), or 98 Canadian cents a share, in the third quarter, down from C$660 million, or C$1.28 a share, a year earlier when it took a big commodities-trading loss.

On a cash basis, closely watched by analysts, BMO earned C$1.00 a share, down from C$1.30. Analysts had expected C$1.20 a share before items, according to Reuters Estimates.

Brad Smith, an analyst at Blackmont Capital, said that core adjusted earnings, after stripping out “myriad” items that could be considered non-recurring, were ahead of his expectations, due in part to “huge” trading results.

Provisions for credit losses totaled C$484 million, with “unusually elevated” specific provisions of C$434 million because of two corporate accounts related to the U.S. housing market, BMO said. Specific provisions were just C$91 million a year earlier.

“We were modelling increased credit provisioning, but it was even higher than we expected,” Smith said.

“That’s not necessarily a bad thing, I’d rather see a bank keep up with its credit deterioration by provisioning at higher levels, than stick its head in the sand and not keep its allowance growing.”

But Dundee Securites analyst John Aiken cut his recommendation on the stock to “sell” from “neutral,” citing disappointing results and the surprising jump in provisions related to the bank’s corporate U.S. real estate portfolio.

The bank’s operations outside of capital markets and U.S. real estate “appeared to have performed quite well” but those positive factors were unlikely to outweigh the “cracks” in BMO’s loan portfolio, Aiken said in a research note.

The bank took capital markets charges of C$134 million, or 19 Canadian cents a share, for derivative contract values and impairments on preferred shares and asset-backed commercial paper.

These charges were partly offset by a recovery of prior-period income taxes, the bank said.

In its domestic personal and commercial banking operations, net income fell 3 percent to C$343 million. The bank said that, when adjusted for a tax recovery one year ago, its domestic banking profit was up 0.8 percent in the latest quarter.

Domestic banking revenue rose 3 percent, while expenses climbed 7 percent, BMO said, citing greater spending to expand and renovate its branch network and to increase its mortgage and financial planning staff.

Profit rose 34 percent in BMO’s capital markets unit to C$259 million despite the writedowns and a slowdown in some investment banking businesses.

Overall, return on equity fell to 13.5 percent from 18 percent a year earlier.

BMO stock was trading at C$43.50 late Tuesday morning.

The shares had fallen 22 percent in 2008 as of Monday’s close, outpacing the 13 percent drop in the S&P/TSX Banks Index, which tracks eight Canadian banks and one mortgage lender. ($1=$1.05 Canadian) (Reporting by Lynne Olver; Editing by Ted Kerr)

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