The one-notch downgrade of Bank of Montreal’s long-term deposit and financial strength ratings by Moody’s Investor Service was said to be a result of the bank’s wholesale investment banking business exposing BMO to greater earnings volatility than assumed in the past. Moody’s expects the bank’s risk-adjusted profitability will remain constrained due to weak earnings from its U.S. retail and wholesale banking businesses.
While the downgrade is unwelcome news for any leveraged financial institution with acquisition aspirations and is likely to add to margin pressure, CI Capital Markets analyst Brad Smith notes that it concludes a review process that was initiated in June 2009. After Friday’s downgrade, BMO’s ratings outlook was upgraded to stable from under review, which had been the status since late in October.
Mr. Smith’s earnings per share forecasts of $4.10 and $4.50 for 2010 and 2011, respectively, remain unchanged as they are already 4% and 15% below consensus. He maintained an Underperform rating at $45 price target on BMO shares.