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Looking for quality not quantity, some analysts are expressing concern about Bank of Montreal's (NYSE:BMO) future profits in the wake of better-than-expected third quarter results that sent markets soaring on Tuesday.

"We believe earnings quality continues to be below average," said Brad Smith, Blackmont Capital analyst.

"In particular, we are concerned about the adequacy of credit allowances and the sustainability of reported net interest margins, which have benefited heavily from the steepening of the yield curve."

With BMO shares trading at valuations modestly higher than its peers, Mr. Smith thinks the market is not adequately discounting for the noted risks to BMO's future earnings, dividend growth and profitability.

"This leaves us little choice but to maintain our SECTOR UNDERPERFORM investment rating and C$43.00 per share target price."

Of the 16 analysts covering Bank of Montreal, five have SELL ratings, seven have HOLD ratings and four analysts recommend the bank as a BUY.

Jim Bantis, Credit Suisse analyst, also reiterated his UNDERPERFORM rating on the stock, but did raise his target price from C$36 to C$42 to reflect an increase in his 2010 earnings forecast.

"We note that despite this quarter’s record revenues (C$2.98 billion) and low tax rate (16%), earnings momentum remains flat and profitability remains challenged (only a 12% ROE)," he told clients in a research note.

He said BMO's current valuation ignores reduced earnings power due to continued balance sheet de-leveraging, increasing credit losses from the bank’s US commercial mortgages and C&I loan portfolio, and unsustainable trading revenues.

Source: Bank of Montreal's Earnings Quality Worries Analysts