March 4, 2008 / 1:07 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.

<p>William Downe, President and Chief Executive Officer of BMO financial group, speaks during their annual general meeting at Le Chateau Frontenac in Quebec City March 4, 2008. REUTERS/Mathieu Belanger</p>

BMO’s stock fell 4.9 percent on the Toronto Stock Exchange after Canada’s fifth-biggest bank also warned that it would not meet its 2008 goals for 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 was down C$2.35 per share at C$46.01 in afternoon trade. It has plunged 18 percent so far this year, the worst performance among Canadian banks.

The bank 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, which totaled C$548 million before tax.

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., trading and structured credit-related positions, preferred shares, and losses on asset-backed commercial paper and structured finance vehicles.

At a press conference after the bank’s annual meeting in Quebec City, BMO President and Chief Executive Bill Downe said there is now zero appetite for certain credit-market securities, even if the underlying assets are of high quality.

“In light of market changes, it is now clear that our positions grew beyond what was in line for our risk tolerance and strategic direction,” he said.

Excluding its writedowns, which were C$362 million after tax, net income was C$617 million, or C$1.19 a share.

Analysts had expected BMO to post earnings of C$1.38 a share before items, according to Reuters Estimates.

“About half of the shortfall versus our core EPS estimates was due to higher than expected loan losses,” RBC Capital Markets analyst Andre-Phillipe Hardy said.

BMO said its quarterly provisions for credit losses soared to C$230 million from just C$52 million a year earlier.

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.

It gave little new information on the future of two troubled asset-backed commercial paper trusts, 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.

“I think the choices are (either) a restructuring, or we’ll recognize a loss of C$500 million and put this behind us,” Downe said.

The bank also 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. It said it has commitments to provide backstop liquidity facilities to these conduits totaling up to C$23 billion.

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

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 would only repeat that it was “fully supportive” of that restructuring work, 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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