There is a difference of opinion among ratings agencies over Bank of Montreal’s report that a previously announced loss in its natural gas trading portfolio would be substantially higher than initially reported.

The loss estimate was bumped up to $680 million pre-tax from the prior estimate of $350 million to $450 million pre-tax.

Fitch Ratings has placed the ratings of Bank of Montreal on Rating Watch Negative.

The rating agency says that the move is driven by Fitch’s concerns regarding BMO’s risk management practices, particularly the bank’s ability to effectively monitor and manage trading risks.

For the Negative Rating Watch to be resolved, Fitch would have to be sufficiently comfortable with BMO’s steps to improve its trading risk oversight capabilities, it explains. “The current loss estimate, while considerable, can be absorbed by BMO’s operating earnings,” it notes. “BMO continues to benefit overall from its diverse earnings mix which will allow it to more readily absorb its trading losses when compared to a less diversified institution.”

Meanwhile, Moody’s Investors Service affirmed the ratings and outlook of BMO (Aa1 for deposits, B bank financial strength, stable outlook) and its subsidiaries.

Moody’s says it affirmed BMO’s ratings because this loss, though sizable and meaningfully in excess of initial estimates, can be absorbed by the bank’s typical quarterly pre-provision, pre-tax earnings (core earnings).

The $680 million loss accounts for 76% of BMO’s average quarterly core earnings for the eight quarters of 2005 and 2006. Moreover, this loss represents only 5% of the bank’s tangible common equity base.

http://www.fitchratings.com