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.”