TORONTO (Reuters) - Bank of Montreal(BMO.TO)'s profit slipped 3 percent in the second quarter due to a weaker capital markets business and it warned on Tuesday its provisions for loan losses would rise in the coming quarters.
Bank of Montreal, Canada's fifth-largest bank by market value, said its net income was C$642 million ($636 million), or C$1.25 a share, in the three months ended April 30.
That's down from C$671 million, or C$1.29 a share, a year earlier, when the bank's results were hurt by large losses in natural gas trading.
The bank said its cash earnings, which adjust for amortization of intangibles, amounted to C$1.26 a share.
But the bank benefited from a lower-than-normal tax rate in the quarter, along with recoveries for previous charges related to the credit crunch, so analysts said its underlying earnings actually fell short of the Reuters Estimates consensus expectation of C$1.20 per share.
Dundee Securities analyst John Aiken said the recoveries on previous charges added 6 Canadian cents a share to BMO's results, while the tax rate of 16.3 percent was "unusually low," so core earnings were below expectations.
BMO, the first Canadian bank to report second-quarter results, said provisions for credit losses would rise more than previously expected, amid deterioration in U.S. real estate markets.
The bank said specific provisions for credit losses in the coming quarters will likely average more than the C$170 million recorded in the first quarter. Second-quarter provisions for bad loans were C$151 million, up from just C$59 million a year earlier.
"We believe that the even-higher guidance on provisions, above the surprising level announced in conjunction with the first quarter, will lead to additional decreases in consensus estimates for BMO," Aiken said in a research note.
Bank of Montreal shares initially rose when the results were issued, but by late morning were unchanged at C$49.00 on the Toronto Stock Exchange. BMO stock is down 13 percent so far this year, the worst performer among the country's six largest banks.
Quarterly profit at BMO Capital Markets, its investment and corporate banking unit, fell 7.5 percent to C$182 million, reflecting a slowdown in investment banking activity.
But the credit markets are showing signs of turning around, its top executive said.
"Our outlook is improving as there are indications that concerns are easing in credit markets as credit spreads are trending towards more normal levels and we are encouraged by these developments," Bank of Montreal President and CEO Bill Downe said in a statement.
Earlier this year, the bank took various capital-markets charges totaling C$324 million after tax because of the widespread troubles in global credit markets.
Its latest quarterly results included a positive capital-markets "valuation adjustment" of C$28 million after tax, as some earlier charges related to trading portfolios and to charges for two commercial paper trusts, Apex and Sitka, were partly reversed.
In May, BMO completed the restructuring of Apex and Sitka, which are trusts that provide credit protection on corporate debt. The bank said it anticipated a further reversal to previous charges in the third quarter.
Profit at BMO's largest unit, Canadian personal and commercial banking, rose 1 percent to C$331 million.
Reporting by Lynne Olver; Editing by Bernadette Baum