Friday, November 16, 2007

BMO Takes $320 Million Charge

RBC Capital Markets, 16 November 2007

First Impression

BMO pre-released $345 million pre-tax ($225 million post-tax) in write-downs and losses in its wholesale division related to:

• Trading and structured credit-related positions (approximately $170 million pre-tax);

• Canadian Asset-Backed Commercial Paper (approximately $135 million pre-tax).

• Capital notes in the Links and Parkland structured investment vehicles or SIVs (approximately $15 million pre-tax).

• Losses from its strategy to reduce its commodities trading portfolio (approximately $25 million pre-tax or $15 million after-tax).

The bank also announced a charge related to its credit card loyalty rewards program liability ($185 million pre-tax or $120 million after-tax), which is partially offset by a gain from the sale of its MasterCard shares of $110 million pre-tax ($85 million after-tax). These two items will be booked in its Personal & Commercial Banking Canada's results.


• With this many potentially negative exposures, the positives are that the write-downs of $345 million pre-tax are less than what we expected ($422 million) because of lower charges from structured investment vehicles and the commodities portfolio wind down.


• The negative is that BMO will invest up to $1.6 billion in the senior debt of its two structured investment vehicles. Senior tranches should have less risk than subordinate positions and we would like to think that the debt was issued at prices that reflect the widening of spreads that has occurred in the last 4 months (since it appears the debt is being issued now) but we cannot know for sure.

• We do not think that markets will be at ease over the bank's exposure to SIVs given the added capital commitment.
The Globe and Mail, Tara Perkins, 16 November 2007

Bank of Montreal on Friday became the latest big Canadian bank to disclose that it's taking a hit as a result of the recent credit crunch, saying it will take a one-time charge of about $320-million in the fourth quarter as a direct result of the financial turmoil.

Bank of Montreal on Friday became the latest big Canadian bank to disclose that it's taking a hit as a result of the recent credit crunch, saying it will record one-time charges of about $320-million in the fourth quarter.

That amount includes a $170-million writedown as a result of trading, structured credit-related positions and preferred shares; a $135-million writedown as a result of Canadian asset-backed commercial paper; and a $15-million hit as a result of its exposure to structured investment vehicles.

Those charges will amount to $210-million after tax. As a result of them, and a number of other one-time issues, the bank said its fourth-quarter financial results will be about 50 cents lower per share.

BMO also said Friday that it will participate in the senior debt issued by its two SIVs, Links Finance Corp. and Parkland Finance Corp., up to a maximum of about $1.6-billion.

Meanwhile, its continuing effort to shrink its commodities trading portfolio continues, and will cause a loss of about $25-million this quarter.

The bank's commodities trading portfolio has been a headache since it first revealed earlier this year that it would be recording hundreds of millions of dollars in losses, largely as a result of its natural gas trading operations. Last quarter the bank took a $149-million hit on the portfolio, bringing the total commodities trading charges this year to $829-million. After the fourth-quarter, that will stand at $854-million.

Bank of Montreal's fourth-quarter results this year will also include a charge of about $185-million because it believes more customers will be redeeming loyalty rewards they earn on their MasterCards.

Royal Bank of Canada similarly said on Tuesday that it will take a $120-million charge because it believes more customers are cashing in credit card points.

On the bright side for BMO, it expects to see a gain of about $110-million from the sale of shares of MasterCard International Inc.

The bank said that its Tier 1 Capital Ratio “remains strong.”

It has much company among its peers when it comes to taking fourth-quarter writedowns as a result of the turmoil that's rocked financial markets in recent months.

Earlier this week, Canada's biggest bank, Royal Bank of Canada, said it will record a $360-million charge as a result of its exposure to subprime mortgage-related securities. Bank of Nova Scotia said it will take a $190-million hit as a result of its investments in ABCP and structured credit instruments. Canadian Imperial Bank of Commerce pre-announced a $463-million charge on its exposure to the U.S. mortgage market.

But even that figure pales in comparison to the multi-billion dollar writedowns that the major U.S. banks are taking.

RBC Capital Markets analyst Andre-Philippe Hardy noted that the writedowns were less than the $422-million he had expected BMO to announce.

However, on the negative side, he doubts the markets will be at ease with BMO's exposure to SIVs, given the bank's decision to invest up to $1.6-billion.

“We would like to think that the debt was issued at prices that reflect the widening of spreads that has occurred in the last four months (since it appears the debt is being issued now) but we cannot know for sure,” he wrote in a note to clients, adding that he hopes to find out more when the bank releases its full results on Nov. 27.

Dundee Capital Markets analyst John Aiken said that he thinks the announcement will be a positive for BMO.

“Although multi-layered, the charges were not as large as had been speculated by some camps.”
Financial Post, Grant Surridge, 16 November 2007

BMO's morning revelations that it will take a $320-million charge in its fourth quarter could provide an opportunity for investors, says Blackmont Capital analyst Brad Smith.

BMO's stock has been hammered since August, due at least partly to concerns over the bank's exposure to mortgage-backed securities and investments of similar ilk.

Analysts had predicted BMO's writedowns on such investments could have been even higher than those announced today.

"This morning's confirmation that net losses to be recorded in Q4/07 are expected to reduce EPS by only $0.50, confirms that the negative market sentiment has surpassed real loss potential," writes Mr. Smith.

He upgrades from "hold" to "buy" and maintains his $72 per share target.
Financial Post, David Pett, 16 November 2007

Impressive decision making by Toronto-Dominion Bank's top brass over the past few months is garnering rave reviews from two analysts Friday.

To start, Desjardins Securities analyst Michael Goldberg said in a note to clients that all the bad news about structured credit writedowns at the other banks, can be seen as good news for TD.

"TD is the only one of the major banks not to pre-announce any charge related to structured credit," Mr. Goldberg said "Why? Because it has no meaningful issues related to structured credit in the US or Canada."

He added that TD exited this business months ago because it did not like the lack of transparency and took a not-insignificant charge at the time.

The analyst also applauded the company's decision to acquire Commerce Bancorp, "a great retail banking franchise in the US" and avoid activist pressure to purchase discount brokerage E*Trade, whose shares tumbled earlier this week amid fears of a possible bankruptcy.

Mr. Goldberg said he expects TD to continue delivering stellar performance going forward and maintained his "top pick" rating on the bank and left unchanged his $84 price target.

Citigroup analyst Shannon Cowherd echoed Mr. Goldberg's sentiments on all points and raised her fiscal 2009 earnings per share estimate from $6.43 to $6.60 based on the company's strong domestic retail franchise and leverage of the new sizable U.S. platform.

She maintained her "hold" rating and $75 price target however, telling clients she remains cautious regarding the the current credit crisis, also noting the integration costs associated with the Commerce Bancorp deal.
Dow Jones Newswires, 16 November 2007

11:54 There's a notable absence in list of Canadian banks taking 4Q credit-related charges - Toronto-Dominion. Desjardins Securities says there's three positives to consider. TD "has no meaningful issues related to structured credit in the US or Canada" because it exited the business some time ago, and took a charge then. TD acquiring "great retail franchise" in Commerce Bancorp, and also "stands to benefit" from troubles at E*Trade, as TD Ameritrade could pick up skittish clients. Still, investors may be tarring TD with same brush: its shares have fallen in line with peers.

10:41 Given trading and structured credit-related losses at Bank of Nova Scotia and Bank of Montreal, it's "plausible" Royal Bank of Canada and CIBC will report "meaningful" trading losses in Q4, Genuity Capital Markets says. Chances are less likely for Toronto-Dominion. Absence of disclosure from CM, RY and TD could reflect different market positioning, analyst says, but more likely relates "to the banks' different perspective on what is considered unusual versus operating."

9:39 When the market is expecting charges of up to C$500M, then it's good news when the sum is only C$260M, Dundee Securities says. Investors should receive Bank of Montreal's news with sigh of relief, analyst says, although niggling concerns remain. Like its peers, BMO offsets charges on structured credit and trading with gains from shares in credit card holdings, in this case MasterCard. However, the potential for further charges related to structured investment vehicles remains. Dundee backs outperform rating given recent 10% decline.