Bank of Montreal warns of credit pressures after profit miss, shares fall

By Nivedita Balu and Arasu Kannagi Basil

TORONTO (Reuters) -Bank of Montreal on Tuesday warned it would need to continue to set aside money for loans that are unlikely to be repaid, after the Canadian lender reported lower-than-expected profit for the sixth time in a row.

Shares fell 6% in Toronto and triggered a rating downgrade, the stock's second in a month, on a worsening credit outlook.

"We freely admit that we may be closing the barn door after the animals have escaped, the pace of deterioration in credit and BMO's relative over-exposure to commercial infer ongoing pressure to the bank's earnings," Jefferies analyst John Aiken wrote, downgrading the stock to "hold" from "buy."

Third-quarter loan loss provisions were higher than analysts had forecast, in part due to impaired provisions for two customers, one in the United States and one recorded under its Capital Markets business.

"We've investigated the circumstances that led to recent impairments, and the conclusion is, for some customers, the combination of prolonged high interest rates, economic uncertainty and changing consumer preferences had an acute impact," BMO CEO Darryl White told analysts.

Fifteen accounts drove about half of the year to date impaired provisions in its wholesale portfolio, White said.

Chief Risk Officer Piyush Agrawal said the increase in loss provisions in the retail sector was "systemic" and in wholesale, he said it was not "thematic to a sector."

"I'm confident we've looked through our files," he said about the bank's loans to larger clients or companies.

About 43% of its U.S. revenue comes from the commercial segment while about a quarter of overall profit comes from the United States.

The lender said it would start to see a recovery in 2025 as central banks cut interest rates and unemployment stabilizes which would ease some pressure for consumers and businesses falling behind on their loan repayments.

Meanwhile, peer Bank of Nova Scotia,, Canada's fourth-largest bank by market capitalization, beat profit estimates, powered by strong growth at its businesses at home and overseas, which spans across North America, Latin America and the Caribbean. Its shares were up 2.5%.

Canadian banks have sought growth south of the border, expanding through acquisitions or brick by brick as opportunities in a saturated and highly regulated market at home were limited.

BMO purchased U.S. regional lender Bank of the West for $16.3 billion last year, while Scotiabank looked further down, expanding in largely underbanked areas in South America and Latin America, focusing on the Pacific Alliance trade bloc.

Scotiabank is now betting on the $1.6 trillion North American trade, concentrating on Mexico and the United States. Most recently, Scotiabank invested $2.8 billion in U.S. regional bank KeyCorp, its first exposure to the region.

But BMO and other Canadian banks that have a U.S. presence have faced many challenges in a competitive banking market there, forcing them to spend more to retain deposits and boost loan growth.

BMO, Canada's third-largest lender, said provision for credit losses jumped to C$906 million ($672.8 million) in the third quarter from C$492 million a year earlier. Analysts were expecting C$734 million, according to LSEG data.

"The weakness was widespread with all segments showing some deterioration," TD Securities analyst Mario Mendonca wrote in a note.

BMO earned C$2.64 per share, compared with analysts' expectations of C$2.76.

Scotiabank booked a 0.7% fall in adjusted income to C$2.19 billion and earned C$1.63 per share, 1 Canadian cent more than estimates.

($1 = 1.3466 Canadian dollars)

(Reporting by Arasu Kannagi Basil and Pritam Biswas in Bengaluru and Nivedita Balu in Toronto; Editing by Shilpi Majumdar, David Holmes, David Evans and Mark Porter)