Moody’s Investors Service has placed the long-term ratings of the Bank of Montreal and all its subsidiaries on review for possible downgrade, the rating agency said Thursday.

Moody’s also downgraded the bank financial strength rating of Harris National Association, BMO’s primary bank operating company in the US, and the rating outlook for Harris NA’s bank financial strength rating remains negative. BMO’s and Harris’ short-term ratings are unaffected by these rating actions and were affirmed by Moody’s.

The rating agency says that its review will focus on: the potential for continuing volatility in BMO’s capital markets business; the timeframe for Harris Financial’s return to profitability on a consistent basis; the prospect for continuing credit losses in Canada and the United States, and BMO’s prospective risk-adjusted profitability before and after loan loss provisions and taxes.

Moody’s senior vice president, Peter Routledge, said “BMO’s review for possible downgrade comes at a time when the bank has persistently reported lower risk-adjusted profitability, relative to similarly rated peers due to net losses in its US businesses. Furthermore, a prolonged period of above average credit costs could intensify pressure on BMO’s profitability.”

Routledge added that “the downgrade of Harris NA’s bank financial strength rating reflects a very low level of pre-provision profitability and the potential for continuing net losses associated with high credit costs.”

Moody’s said that BMO’s credit ratings “have long been predicated on the view that its better-than-peer loan loss performance compensated for below-peer risk-adjusted profitability.” However, it notes that the recent period of stress has revealed weaknesses in BMO’s U.S. business (both retail banking and capital markets) which have led to a deviation from that rationale.

The U.S. weighting in BMO’s business mix has also contributed to the erosion of its credit advantage relative to similarly rated peers, it says.

Moody’s says that it will evaluate these weakening rating factors in comparison to steady improvements in the bank’s Canadian retail banking franchise, consistent performance in its Canadian wealth management arm, and strong capital ratios. The review will focus on whether the deteriorating rating factors outweigh the strengthening Canadian franchise and its capital position.

In reaction to the news, BMO said: “We have positive momentum across all of our businesses, including Harris — which is a strong competitor.”

The bank added: “While credit losses remain elevated, as discussed in connection with our Q3 results, we continue to believe that we will perform better than our peers across our different portfolios in this credit cycle. We have taken actions over this past year to significantly reduce our exposure to losses from trading activities.”

With files from Megan Harman