BMO Financial Group has issued a major profit warning for its second quarter because of bad bets in the commodity markets that could cost it as much as $450 million.

BMO said Friday its Q2 earnings will be reduced by 45 to 55 cents a share as the bank records major accounting losses. The exact amount will be known when it releases its Q2 results on May 23.

BMO three-month trading

BMO shares opened at $69.50 on the TSX, down $1.77. They clawed back some of that loss by the end of the trading day, closing at $70, down $1.27. 

The bank said the overall pre-tax "mark-to-market" losses are estimated to be in the range of $350 million to $450 million.

Mark-to-market accounting is used to reflect changes in the market value of a security, not the book value.

The bank said its positions in the energy market, primarily for natural gas, were negatively affected by changes in market conditions.

BMO said the market had become increasingly illiquid and volatility dropped to historically low levels.

The bank said it also changed its approach to estimating the market value of its portfolio.

"The commodity trading losses were the result of decisions that did not adequately recognize the vulnerability of the portfolio to changes in market volatility," Bill Downe, president and CEO of BMO, said.

In a statement, the bank said it could experience more losses, or some gains, as it continues to reposition its commodity portfolio. BMO said it expects any additional losses would be much lower than those announced Friday.

"Being this far offside on energy derivatives, it's quite something," said Bill Harris, a partner with Avenue Investment Management.  

"Really, the bottom line to me is it shows a lack of risk controls."

Analysts polled by Thomson Financial before the bank's announcement had an average forecast for BMO earnings of $1.33 a share for the quarter.

CIBC issued a statement saying it "has experienced no material or unusual gains or losses in relation to its commodity trading activities."

BMO isn't the only market player to be hurt by natural gas trades that went awry. Last September, the U.S.-based Amaranth Advisors hedge fund admitted it lost $6 billion US in natural gas trading. The fund said conditions in the natural gas market deteriorated and liquidity dried up so quickly that it was not able to unwind its energy positions.