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Bank of Montreal Faces Challenges Ahead - Blackmont

Date: Thursday, May 28, 2009
Author: Seeking Alpha.com

Despite beating the Street’s expectations this week with its first quarter result, Blackmont Capital analyst Brad Smith downgraded the stock to a “sell” Wednesday.

BMO reported adjusted diluted cash earnings per share of C$.93 Tuesday, C$.03 ahead of consensus. However, Mr. Smith warned of some issues going forward.

BMO’s ratio of allowances to trailing two-year net write-offs fell to 87% from 102% in the first quarter, their lowest level since 1996, he noted.

In addition, its structured investment vehicle exposure, which now totals $7.9-billion in funding/commitments, could “very likely pressure earnings and capital in the coming quarters, as assets are currently valued at a $1.9-billion discount to commitments," he said.

The recent outperformance of the bank’s share price also has it trading at 6% premium to its peers, and its highest level since October 2007.

Mr. Smith said:

Based on its premium valuation, ongoing SIV exposure, and the inadequacy of the bank’s allowance levels, we are reducing our investment recommendation on BMO.

He maintained his C$32 price target, but reduced the stock’s rating from a “hold” to a “sell.”