BMO downgraded, price target cut at RBC on U.S. credit concerns

financialpost.com:

Bank of Montreal’s stock was downgraded by an influential Bay Street analyst on concern the lender is building up credit losses at a faster pace than its U.S. peers.

Royal Bank of Canada equity analyst Darko Mihelic cut his rating on Bank of Montreal shares to sector perform and reduced his price target to $118 from $124. The stock fell as much as four per cent per cent.

Bank of Montreal has posted two quarters of disappointing financial results as it set aside more money for potentially bad loans than analysts had forecast and signalled that provisions for credit losses could remain high for the rest of the year. The lender acquired San Francisco-based Bank of the West last year, significantly increasing its U.S. footprint — as well as its exposure to credit losses south of the border.

“We have seen enough evidence that BMO’s credit is not as strong as we once thought and hence a lower valuation is warranted,” Mihelic wrote in a report published Tuesday. “We believe that as the credit cycle progresses, BMO’s risk premium will move higher, as BMO’s U.S. credit result appears to be an outlier among its U.S. peer group,” he said, adding that the bank’s second-quarter credit results were worse than its Canadian rivals.

Mihelic changed his view on the stock after taking a “deep dive” into BMO’s credit compared to U.S. banks that have reported second-quarter earnings. He said he found that the Canadian bank’s provisions for potential credit losses as well as already non-performing loans are rising at a faster pace.

During the bank’s second-quarter earnings call, chief risk officer Piyush Agrawal said that while Bank of Montreal’s impaired provisions could remain elevated for the next couple of quarters, “given the quality and