Regulatory and enforcement officials are seeking more information from the Bank of Montreal (BMO) related to nearly C$700 million in natural gas trading losses the bank reported in April, BMO said in its fiscal third quarter earnings report last week.
The bank reported a 7% drop in third quarter earnings after posting further commodities trading loss. BMO, the fourth largest bank in Canada, earned C$660 million (C$1.28/share) in the three months ended July 31. In the year-ago period the bank reported a profit of C$710 million (C$1.38/share).
“BMO has received inquiries, requests for documents and subpoenas pertaining to the commodities trading losses from securities, commodities, banking and law enforcement authorities,” BMO said. “As these inquiries are in the early stages, we are unable to determine whether any proceedings against the bank will result. We are cooperating with all of these authorities.”
Toronto-based BMO Financial Group CEO Bill Downe said the company “made significant progress in reducing our trading book during the quarter, and while further reduction is still intended, it will occur within the ongoing trading activity of the business.” He said the further spindown would occur over the next two quarters.
Third quarter commodities business losses were recorded in BMO Capital Markets, primarily in its U.S. operations. BMO Capital Markets net income for the third quarter was C$196 million (including C$97 in million after-tax losses on commodities) compared with C$203 million in the year-ago period and net income of C$199 million (including C$90 million in after-tax losses on commodities) in the second quarter.
The bank said it had taken “significant steps” to reduce the size of its commodities portfolio and its risk during the third quarter. “Approximately 50% of the loss on the portfolio in the quarter related to certain large proprietary positions that we eliminated by entering into offsetting contracts with a counterparty,” BMO said. “The other 50% was largely attributable to other trading activities, which included actions related to managing and reducing the risk in the remainder of the portfolio.”
BMO said it reduced the fair market value of commodity derivative contracts assets from $22.7 billion to $11.5 billion during the quarter.
“With the exception of our commodities business, we had good results in BMO Capital Markets, with revenues in some of our investment banking businesses doubling from a year ago,” Downe said.
When the trading losses, which stemmed from wrong-way trades in the gas markets, first came to light in April they were estimated at C$350-450 million (see NGI, April 30). A later review revealed losses closer to C$680 million (see NGI, May 21).
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