Moody’s Investors Service affirmed the ratings and outlook of the Bank of Montreal and its subsidiaries after it announced a $350 million-450 million pre-tax mark-to-market commodity trading loss, primarily related to its natural gas positions.

Two factors account for the loss — first, the market for natural gas derivatives became less liquid while volatility decreased; second, BMO refined its approach to estimating the market value, which caused a further decline.

Despite the severity of the loss, Moody’s said that it affirmed BMO’s bank financial strength and deposit ratings because the loss is easily absorbed by the bank’s quarterly earnings and tangible common equity.

At $450 million, the loss would account for approximately 50% of BMO’s pre-provision, pre-tax earnings in a typical quarter and 3% of its tangible common equity base. BMO’s bank financial strength rating is bolstered by the predictable earnings that accrue from its very strong presence in Canadian financial services where it enjoys market shares in excess of 10%, strong credit-risk management discipline, and its market presence in the greater Chicago area provided by its Harris Bankcorp, Inc. subsidiary.

In commenting on the loss, Moody’s senior credit officer Peter Routledge noted that “the loss does highlight the fact that maintaining sizable trading portfolios, as BMO does, exposes a bank to low-frequency, high severity events that far exceed its value-at-risk and tolerance levels for maximum quarterly trading losses.”

Routledge also noted that “BMO has historically had a fairly prudent market risk appetite and thus we expect the bank to respond to this event by augmenting the bank’s measurement, monitoring, and control systems to prevent other malignant exposures from developing in the future.” Nonetheless, the event raises some concerns, in Moody’s view, about controls at BMO.