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Blackmont cuts BMO to “sell”

Globe and Mail Update

Blackmont Capital slapped a “sell” rating on Bank of Montreal shares Wednesday on fears the bank hasn't set aside enough to cover loans that could turn bad later this year.

“There has been a lot of optimism about the sector, which we hope proves correct, but that's not the point,” said analyst Brad Smith as he reduced his rating from “hold” and maintained his $32 price target. “The point is that within the group of banks, which are collectively solid, there are some organizations that are better positioned.”

The bank reported a $358-million profit, a decrease of $284-million from the same period a year ago, as provisions for bad loans rose and a weak stock market hit the bank's mutual fund and investment businesses. Adjusted cash earnings per share, of 93 cents, came in slightly above analysts' expectations.

Its provisions for credit losses increased by $221-million from a year ago, to $372-million, though it surprised analysts by setting aside less than it had in the last quarter.

“We believe credit provisioning was below levels that will ultimately prove to be required to absorb likely future losses and leave the bank with an adequate allowance level at the end of the ongoing period of economic contraction,” Mr. Smith said.

He also expressed concern about the bank's off-balance sheet exposure, which he pegged at $7.9-billion (U.S.). If markets deteriorate, he said, the bank could be forced to set aside money to cover substantial losses.

“These structured investment vehicles have been an incremental risk factor,” he said. “Combine that with our view that credit provisioning is behind the curve, and you see increasing risk in our earnings outlook.”

Desjardins maintains “hold” rating

Michael Goldberg, an analyst at Desjardins Securities, kept his rating at “hold” as he said the bank's decision to set aside less cash could be a sign that loss estimates have been overstated. The financial sector on the Toronto Stock Exchange rallied on Tuesday on this hope, gaining 5.5 per cent.

“Management provided some commentary on the economic outlook, saying that the No. 1 uncertainty affecting future performance of the Canadian banks is the outlook for the credit cycle,” he said. “With increasing unemployment and bankruptcies, we believe that the cycle is likely to continue to intensify. Therefore, increasing provisions are expected to continue to be elevated, albeit within a manageable range.”

More to come

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