BMO downgraded, price target cut at RBC on US credit concerns

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Bank of Montreal’s stock was downgraded by an influential Bay Street analyst on concern the lender is building up credit losses at a faster pace than its U.S. peers.

Royal Bank of Canada equity analyst Darko Mihelic cut his rating on Bank of Montreal shares to sector perform and reduced his price target to $118 from $124. The stock fell as much as four per cent per cent.

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Bank of Montreal has posted two quarters of disappointing financial results as it set aside more money for potentially bad loans than analysts had forecast and signalled that provisions for credit losses could remain high for the rest of the year. The lender acquired San Francisco-based Bank of the West last year, significantly increasing its U.S. footprint — as well as its exposure to credit losses south of the border.

“We have seen enough evidence that BMO’s credit is not as strong as we once thought and hence a lower valuation is warranted,” Mihelic wrote in a report published Tuesday. “We believe that as the credit cycle progresses, BMO’s risk premium will move higher, as BMO’s U.S. credit result appears to be an outlier among its U.S. peer group,” he said, adding that the bank’s second-quarter credit results were worse than its Canadian rivals.

Mihelic changed his view on the stock after taking a “deep dive” into BMO’s credit compared to U.S. banks that have reported second-quarter earnings. He said he found that the Canadian bank’s provisions for potential credit losses as well as already non-performing loans are rising at a faster pace.

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During the bank’s second-quarter earnings call, chief risk officer Piyush Agrawal said that while Bank of Montreal’s impaired provisions could remain elevated for the next couple of quarters, “given the quality and diversification of our portfolio, allowance coverage and strong risk-management capabilities, we remain well-positioned to manage the current environment and emerging risks.”

A bank spokesperson declined to comment on Mihelic’s report.

Large provisions loom

U.S. banks are facing some credit deterioration, but “it does not appear to be occurring at the elevated pace that BMO has witnessed,” he said. And there’s more pain looming tied to at least one major borrower.

Bank of Montreal already took several hits related to “idiosyncratic” items in the first and second quarters, Mihelic wrote, adding that it’s likely to record a one-time impact in the third quarter tied to loans of US$100 million made to SunPower Corp., which is under severe financial distress.

Ten analysts covering Bank of Montreal have buy ratings on the stock, four have holds and two have sells, according to data compiled by Bloomberg. The average 12-month price target is $130.29.

Bank of Montreal shares were also trading without the dividend on Tuesday, the record date for the firm’s quarterly payout.

—With assistance from Bre Bradham.

Bloomberg.com

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