By Nivedita Balu and Arasu Kannagi Basil

Bank of Montreal’s Warning on Loan Provisions

TORONTO (Reuters) – Bank of Montreal on Tuesday warned it would need to continue to set aside money for loans that are unlikely to be repaid, after the Canadian lender reported lower-than-expected profit for the sixth time in a row.

Shares fell 6% in Toronto and triggered a rating downgrade, the stock’s second in a month, on a worsening credit outlook.

“We freely admit that we may be closing the barn door after the animals have escaped. The pace of deterioration in credit and BMO’s relative over-exposure to commercial infer ongoing pressure to the bank’s earnings,” Jefferies analyst John Aiken wrote, downgrading the stock from “buy” to “hold.”

Third-quarter loan loss provisions were higher than analysts had forecast, in part due to impaired provisions for two customers, one in the United States and another recorded under its Capital Markets business.

“We’ve investigated the circumstances that led to recent impairments, and the conclusion is, for some customers, the combination of prolonged high interest rates, economic uncertainty, and changing consumer preferences had an acute impact,” BMO CEO Darryl White told analysts.

Fifteen accounts drove about half of the year-to-date impaired provisions in its wholesale portfolio, White mentioned.

Chief Risk Officer Piyush Agrawal said the increase in loss provisions in the retail sector was “systemic,” while in wholesale, he noted it was not “thematic to a sector.”

“I’m confident we’ve looked through our files,” he added regarding the bank’s loans to larger clients or companies.

About 43% of its U.S. revenue comes from the commercial segment, while about a quarter of overall profit comes from the United States.

The lender stated it would start to see a recovery in 2025 as central banks cut interest rates and unemployment stabilizes, easing some pressure for consumers and businesses falling behind on their loan repayments.

Meanwhile, peer Bank of Nova Scotia, Canada’s fourth-largest bank by market capitalization, beat profit estimates, powered by strong growth in its businesses at home and overseas, including North America, Latin America, and the Caribbean. Its shares were up 2.5%.

Canadian banks have sought growth south of the border, expanding through acquisitions or brick by brick, as opportunities in a saturated and highly regulated market at home are limited.

BMO purchased U.S. regional lender Bank of the West for $16.3 billion last year, while Scotiabank looked further down, expanding in largely underbanked areas in South America and Latin America, focusing on the Pacific Alliance trade bloc.

Scotiabank is now betting on the $1.6 trillion North American trade, concentrating on Mexico and the United States. Most recently, Scotiabank invested $2.8 billion in U.S. regional bank KeyCorp (NYSE:KEY), marking its first exposure to the region.

However, BMO and other Canadian banks with a U.S. presence have faced challenges in a competitive banking market there, forcing them to spend more to retain deposits and boost loan growth.

BMO, Canada’s third-largest lender, said provisions for credit losses jumped to C$906 million ($672.8 million) in the third quarter from C$492 million a year earlier. Analysts were expecting C$734 million, according to LSEG data.

“The weakness was widespread with all segments showing some deterioration,” TD Securities analyst Mario Mendonca noted.

BMO earned C$2.64 per share, compared to analysts’ expectations of C$2.76.

Scotiabank reported a 0.7% fall in adjusted income to C$2.19 billion, earning C$1.63 per share, exceeding estimates by 1 Canadian cent.

($1 = 1.3466 Canadian dollars)