01:13 PM EDT, 10/03/2024 (MT Newswires) -- BMO's underperformance has been due to weak credit performance that has resulted in consensus 2025E EPS being cut by 16% since the start of the year, writes National Bank. Expectations have become more realistic. In the case of PCLs, 2025E now implies a 50 bps+ loss rate, rather than a mid-30s loss rate embedded in forecasts at the start of the year. "With more realistic expectations, the Fed having embarked on a rate cut cycle, and with the U.S. election uncertainty nearing an end, we believe investors could warm up to BMO. However, we believe BMO needs to take extraordinary measures to clear/reduce its credit overhang," analyst Gabriel Dechaine notes.

BMO will report a one-time pre-tax gain of $1.2 billion during the fourth quarter, from the resolution of a legacy M&I issue, Dechaine adds. "In our opinion, BMO should consider "kitchen sinking" Q4/24 results and converting this one-time gain to strengthen its performing Allowance for Credit Losses (ACL)." Given that the bank is guiding to elevated impaired loan losses for the next 2-3 quarters, Dechaine believes the IFRS 9 accounting model should accommodate this allowance "top-up".

If BMO does not take such an action, its performing ACL coverage ratio would dip to an insufficiently low level relative to the peer group (and to BMO's historical standards, Dechaine writes. "In short, using the proceeds from this one-time gain to boost performing provisions should reduce, if not eliminate, the current credit overhang on the stock."

BMO is rated Outperform, with a $127 target.

Price: 123.12, Change: +0.23, Percent Change: +0.19