04 October 2006

BMO May Be Hurt by Drop in Gas Prices

Bloomberg, Doug Alexander and Sean B. Pasternak, 4 October 2006

Bank of Montreal may be the hardest- hit Canadian bank as natural-gas prices decline and the collapse of hedge fund Amaranth Advisors LLC cuts into trading revenue.

The country's No. 4 bank by assets has more at stake in commodity and foreign-exchange trading than any of its Canadian rivals, according to Genuity Capital Markets. Currencies and commodities such as gas futures generated C$250 million ($223 million), or 44 percent, of Bank of Montreal's trading revenue in the first nine months of this fiscal year, Genuity estimates.

That compares with 30 percent at Bank of Nova Scotia and 18 percent at Canadian Imperial Bank of Commerce and TD Bank. Royal Bank of Canada, the country's largest bank, got only 15 percent of its trading revenue from commodities and foreign exchange over the same period, according to Genuity, a Toronto-based securities firm.

"We think some of the gains that BMO had in that segment are going to start to dissipate," Genuity analyst Sumit Malhotra said in a telephone interview. "They've ridden that wave all through 2006."

Toronto-based Bank of Montreal's trading revenue more than doubled in the first nine months of fiscal 2006 to C$564 million, outpacing gains at all of its rivals. That growth may slow now that Amaranth, the Greenwich, Connecticut-based firm whose two main hedge funds lost $6.5 billion last month, has exited energy trading and natural-gas prices have dropped 28 percent since Aug. 1, Genuity analysts Malhotra and Mario Mendonca said in a research note published Sept. 21.

Amaranth, whose Calgary-based trader Brian Hunter sank the funds with wrong-way bets on natural-gas prices, was a Bank of Montreal client, the analysts said. Amaranth sold its energy- trading bets to JPMorgan Chase & Co. and Citadel Investment Group LLC, a Chicago-based hedge fund. Bank of Montreal spokesman Ralph Marranca declined to comment on Amaranth.

Bank of Montreal shares have gained about 3.8 percent since Amaranth first disclosed its losses on Sept. 18, on pace with other Canadian banks.

A year ago, Bank of Montreal "kind of introduced themselves to the world as being a commodity trader, natural gas specifically," said Malhotra, who rates the bank's shares a "hold." "Now the comparisons become a lot tougher."

Bank of Montreal, which held its annual meeting this year in Calgary and bases its energy group in the Alberta city, doesn't expect the decline in gas prices to cause a drop in trading revenue, Chief Operating Officer William Downe said in an interview. He declined to comment on Amaranth. Steve Bruce, a spokesman for Amaranth, also declined to comment.

"Our business is really built around the flows of our clients," Downe said. They "continue to be active in the markets, so I really don't anticipate that it will slow the market particularly and we don't anticipate it will have an effect on us."

Michael Goldberg, an analyst at Desjardins Securities in Toronto, said he contacted Bank of Montreal after trouble first surfaced at Amaranth in mid-September. He doesn't expect a "sharp" decline in the bank's trading revenue this quarter.

"But I'm just not sure that at some other time in the future that the trading revenue might possibly be a problem."