Bank of Montreal discloses $350M to $450M in commodity-trading losses

TORONTO (CP) - The Bank of Montreal (TSX: BMO.TO) had disclosed losses of between $350 million and $450 million on commodity trading.

The pre-tax mark-to-market losses will cut second-quarter earnings by 45 to 55 cents per share, BMO Financial Group said Friday.

BMO shares dropped 3.3 per cent, or $2.43, to $69.45 in early trading on the Toronto Stock Exchange.

The bank's losses came as positions in the energy market, primarily for natural gas, were hit by low prices, weak liquidity and vanishing volatility.

"These losses were particularly disappointing and the result of decisions that did not adequately recognize the vulnerability of the portfolio to changes in market volatility," BMO chief executive officer Bill Downe said in a conference call.

"We are conducting a thorough review and actions have been taken to address the current situation and reduce the likelihood of a recurrence."

Downe said in the aftermath of Hurricane Katrina, natural gas market volatility increased significantly.

"Clients wanted to lock in prices and the bank increased its book of business related to this market," he said.

But after early gains, prices slipped in the last half of 2006, though BMO continued its trading.

"While natural gas prices continued to decline, the market became increasingly liquid and volatility dropped to history lows. As a result, we have a large portfolio with significant mark-to-market losses at this time," he said.

Before the announcement, analysts were on average expecting BMO to report earnings of $1.33 per share for the quarter ended April 30, according to Thomson Financial.

The bank will release its quarterly results May 23.

It's the biggest shock to a Canadian bank's earnings since the Canadian Imperial Bank of Commerce paid $2.4 billion to settle Enron-related litigation in the summer of 2005.

In a statement issued after the BMO announcement, CIBC said it "has experienced no material or unusual gains or losses in relation to its commodity trading activities."

But BMO is not alone in coming to grief on natural gas trading.

Last September, Aramath Advisors LLP became the largest hedge fund to ever collapse after losing about US$6 billion in one week on natural gas trading.

Mark-to-market losses - reflecting what would happen if positions were liquidated immediately - are not realized losses, and "it is possible that as this portfolio is repositioned it could experience subsequent gains or losses depending on future market conditions," the bank noted in its initial statement.

"BMO's expectation is that, even using adverse assumptions, any losses would be in a substantially lower range than those announced today."

It added that its capital position remains solid and "this loss does not impair the ability of the company to pursue its strategic agenda."