Credit Suisse analyst James Bantis is lowering his estimates and price target on Bank of Montreal (BMO) after the Canadian bank missed earnings estimates yesterday. BMO reported EPS of C$1.20 against a consensus of C$1.22. Despite a rebound in its retail division, Bantis is bearish on the stock, citing impaired loan losses and unexpected writedowns:
For the second consecutive quarter, impaired loans rose sharply. Net formations increased to $554 million of which $234 million related to the CRE portfolio within Fairway (US ABCP conduit). 2) With the higher formations, management was compelled to suggest loan loss provisions will exceed the Q1/08 experience of $170 million (by 10-20%). 3) With the low level of provisioning exhibited this quarter, net impaired loans rose to $484 million, from a surplus reserve position of $371 million in Q2/07.
Given the uncertainty surrounding the credit quality for its structured products and the bank’s recent propensity for unusual surprises, multiple expansion is not foreseen in the near term. BMO’s current valuation discount of 9.7x our 2008 EPS estimate (vs. peers of 10.5x) is warranted at this time. We are lowering our EPS estimates for 2008 (to $4.95) and 2009 (to $5.55) to reflect higher credit provisioning.
Credit Suisse’s 12-month price target drops from $56 to $54. Shares remain Neutral-rated.