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by David Parkinson

When a major Canadian bank kicks off the sector's quarterly earnings-reporting season with considerably better-than-expected profits, you'd think that might put a charge in not only its own stock, but those of its peers. So when quite the opposite happened Tuesday after Bank of Montreal's (NYSE:BMO) consensus-beating numbers, you had to figure that something about those big numbers didn't quite pass the sniff test.

After some initial enthusiasm, BMO's stock ultimately fell 41 cents to $53.14 on the Toronto Stock Exchange Tuesday following release of its numbers, despite beating analysts' profit and revenue estimates. The rest of the banking sector followed suit, with the S&P/TSX financials subindex losing 0.7 per cent on the day.

Now, as Bay Street's banking analysts weigh in on BMO's results, we're starting to see why the strong results garnered such a cool reception.

Desjardins Securities analyst Michael Goldberg noted that the source for much of BMO's unexpected revenues and profits showed up in a non-interest line item known as "other other revenues" - something of a black box of funds about which BMO provided virtually no details, but by definition they were almost certainly one-time gains.

These "other other revenues" were the highest BMO had recorded in 18 years. Without them, Mr. Goldberg said, the bank's net income would have been about 10 cents a share lower - bringing it more in line with analysts' estimates.

Meanwhile, the earnings release revealed the troubling news that BMO's credit quality has deteriorated. Blackmont Capital's Brad Smith noted that impaired loans rose 13 per cent from the second quarter, including a 32 percent jump in impaired loans to financial institutions and a 15 percent rise in impairments to commercial real estate loans.

Much of the problems lay in the bank's U.S. loan portfolio, through its Harris Bank division.

"BMO’s latest results show that it is still in the grip of a bleak U.S. credit environment, with Harris’s credit quality no better than that of other major U.S. banks," Mr. Goldberg concluded. That's some pretty damning company to find yourself in.

Mr. Goldberg has a "hold" recommendation on BMO's stock, with a $55.50 target price.

Source: Why Did BMO's Strong Results Garner a Cool Reception?