BMO Put on Review-Negative by Moody's

Moody’s Investors Service has announced:

Moody’s Investors Service (Moody’s) placed the long-term ratings of the Bank of Montreal (BMO) and all its subsidiaries on review for downgrade.

BMO’s credit ratings have long been predicated on the view that its better-than-peer loan loss performance compensated for below-peer risk-adjusted profitability. In addition, BMO’s profitability, though low, was less volatile than some of its similarly rated peers.

The recent period of financial and economic stress, however, revealed weaknesses in BMO’s U.S. business (both retail banking and capital markets) which have, in turn, led to a deviation from the aforementioned rationale underpinning the ratings (i.e., low credit risk offsetting weaker profitability). Higher loan and trading losses in the bank’s U.S. retail banking and capital markets arms, respectively, have led to two consecutive years of net losses in the U.S. and, in all likelihood, a third in 2009. Moody’s notes that these costs may continue to depress the bank’s risk-adjusted profitability.

The U.S. weighting in BMO’s business mix has also contributed to the erosion of its credit advantage relative to similarly rated peers. BMO has produced a net charge-off ratio on loans that was well below peer medians every year between 1991 and 2007. In 2008 and 2009, Moody’s notes that BMO lagged its domestic peers on this ratio. Although the bank still outperforms peers on many individual asset classes, the bank’s mix (in aggregate) has a more pronounced weighting towards stressed asset classes (e.g., U.S. commercial real estate, residential mortgage, and commercial loans) which has resulted in credit losses above peer averages.

Moody’s will evaluate these weakening rating factors in comparison to steady improvements in the bank’s Canadian retail banking franchise, consistent performance in its Canadian wealth management arm, and strong capital ratios. The review will focus on whether the aforementioned deteriorating rating factors outweigh the strengthening Canadian franchise and its capital position.

Preferred Stock, Placed on Review for Possible Downgrade, currently Aa3

Moody’s rates BNS preferred stock at Aa3; CM at A1; TD at Aa2; NA at A1. Oddly, no preferred share rating is reported for RY although, for instance, the prospectus for Series AR (dated 2009-1-23) discloses a provisional rating of Aa2.

BMO has the following preferred issues outstanding: BMO.PR.H, BMO.PR.J, BMO.PR.K, BMO.PR.L, BMO.PR.M, BMO.PR.N, BMO.PR.O and BMO.PR.P.

One Response to “BMO Put on Review-Negative by Moody's”

  1. […] But then I had a look at their ratings list for Bank of Montreal and hey, looky-looky! All the prefs have “Possible Downgrade, 18 NOV 2009″ under “Watch Status”. It the same thing for BNS, by the way, so the notation is not related to the extant Moody’s Watch on BMO. […]

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