Bank of Montreal Downgraded on Disappointing Q3 Results

Bank of Montreal (BMO) has been downgraded to “sell” by Dundee Securities analyst John Aiken and the bad news may hit other Canadian banks after its third quarter results disappointed.

He said the biggest surprise was BMO’s higher-than-expected provision levels linked to its corporate U.S. real estate portfolio. This will raise concerns about numbers due from Royal Bank (RY) and Toronto-Dominion Bank (TD) on Thursday. While the analyst said they each have regional differences and various exposures, he thinks speculation may hurt shares of Royal and TD despite the fact they have reported meaningful increases in provisions in recent quarters.

Mr. Aiken told clients:

With concerns that we cannot see the end to real estate woes in the United States, this material increase in credit related headwinds will weigh on BMO’s valuation over the coming months.

He noted that other than its capital markets and U.S. real estate businesses, BMO’s operations appear to have performed quite well, even generating enough earnings to almost offset the substantially higher provisions. However, the analyst said with credit issues expected to remain, investors should not count on the positives since cracks continue to show up in BMO’s loan portfolio.

Mr. Aiken said:

Credit woes have befallen BMO for several quarters in a row now, and we believe that it no longer wears the crown of ‘low provision bank.'

He has a C$47 price target on BMO shares.