The Bank of Montreal has eked out a second-quarter profit increase, despite losses on natural gas trading, the bank said Wednesday.

The profit for the three months ended on April 30 was $671 million ($1.29 a share), up $20 million from $651 million ($1.25 a share) in the comparable quarter a year earlier, it said.

BMO three-month trading

"The commodities trading losses lowered what would otherwise have been
good second-quarter results," president and CEO Bill Downe said in a release.

The second-quarter after-tax profit was cut by $90 million (18 cents a share) because of losses on natural gas trading.

The company had said on May 17 that the trading loss was $680 million, but that was a pre-tax number.

On Wednesday, BMO said it had split the losses over two quarters and restated its first-quarter results, taking most of the gas trading loss in that quarter.

The effect of the loss was to push first-half profit down to $1.02 billion ($1.96 a share), off $238 million from the $1.23 billion ($2.42 a share) reported a year earlier.

The drop included $327 million in after-tax trading losses and $88 million for a restructuring charge.

Most of the $680 million pre-tax trading loss — $509 million — was taken in the first quarter.

The hit was reduced, however, as the bank cut $87 million from performance-based compensation and reduced income taxes.

Underlying business growing, bank says

The trading loss obscured what the bank said was a strong second quarter. In personal and commercial banking, profit in Canada was up $63 million or 24 per cent, while U.S. banking profit slid $1 million to $27 million because of  "a difficult economic and competitive environment."

The private client business was up $4 million to $101 million, the best quarter ever. 

BMO capital markets was up $42 million to $289 million before the trading loss. After the loss, profit fell $48 million to $199 million.

Revenue for the second quarter was $2.57 billion, compared to $2.47 billion in the 2006 period. Revenue for the six months was $4.59 billion, compared to $4.95 billion.

Gas quotes questioned

The bank said the trading loss loss followed the use of a different way of valuing its commodities portfolio and changes in the market.

Previously, the portfolio had been marked to market each day by traders and the valuations confirmed monthly, mainly by an external broker.

The natural gas portfolio grew in early fiscal 2007 (starting Nov. 1, 2006), and "we
sought additional verification of the valuations from other independent
sources," the bank said.

Management followed up with an external investigation of the trading, "which resulted in concerns with the reliability of quotes received from the principal external broker."

BMO then suspended its relationship with the brokerage, Optionable Inc., and two commodity executives are no longer employed at the bank.

"We have a new management team in place and risk limits have been reduced," Downe said.

BMO shares closed up $1.32 at $70.20 in TSX trading.