(Bloomberg) -- Bank of Montreal’s shares slumped on concern the firm is overexposed to commercial loan losses and as executives warned of more pain to come.

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The bank put aside more money than forecast for potentially bad loans in the fiscal third quarter, with the provisions denting its US operations, it said in a statement Tuesday. Analysts had already adjusted their estimates to account for weaker credit performance in BMO’s commercial loan book.

Profit was C$2.64 a share on an adjusted basis for the three months through the end of July, falling short of the C$2.75 average estimate of analysts in a Bloomberg survey. Provisions for credit losses totaled C$906 million ($673 million), more than the C$745 million analysts were expecting.

The bank’s shares dropped 6.9% to C$111.52 at 12:11 p.m., the biggest intraday drop since BMO reported a similar earnings miss on higher loan-loss provisions in late May. Jefferies Financial Group Inc. analyst John Aiken downgraded the stock to a hold from a buy.

“We freely admit that we may be closing the barn door after the animals have escaped, the pace of deterioration in credit and BMO’s relative overexposure to commercial infer ongoing pressure to the bank’s earnings.” Aiken wrote in a report. “With BMO’s relative overexposure to commercial on both sides of the border and the lagging nature of credit, the current expected easing cycle by the central banks is not expected to have any immediate relief.”

Scotiabank Results

In contrast to BMO’s results, Bank of Nova Scotia beat analysts’ estimates on higher revenue from its Canadian retail banking and international units. Its shares climbed 1.8% to C$66.78.

Scotiabank’s profit was C$1.63 a share on an adjusted basis in the fiscal third quarter, it said in a statement Tuesday, coming in ahead of the C$1.62 average estimate of analysts in a Bloomberg survey.

Its domestic-banking unit posted adjusted earnings of C$1.1 billion for the three months through July, up 6% from the same period last year. The results come after two years of negative or only slightly positive growth in the bank’s important Canadian division, where loan growth has been slow and provisions for loan losses have eaten into the bottom line.

“Given what we have seen so far in the third quarter earnings (with three of the Big 6 reporting), an ‘in-line’ quarter may just be viewed positively,” Aiken said in a separate report on Scotiabank.

Toronto-Dominion reported its first quarterly loss in decades last week after taking a $2.6 billion provision for fines tied to US money-laundering investigations. It also missed on adjusted earnings after its results were hit by higher insurance claim payouts tied to extreme weather and wildfires.

BMO’s Credit Problem

Bank of Montreal’s credit performance has been worse than many of its peers in Canada and the US as consumers and businesses on both sides of the border have increasingly struggled to pay their bills amid an extended period of high interest rates.

BMO executives said the bank’s retail lending has performed roughly in line with other lenders as unemployment and personal insolvencies have increased. But it has faced higher provisions on commercial and capital-markets loans, where expected losses tied to one or two large accounts can “move the needle,” Chief Risk Officer Piyush Agrawal said during a conference call Tuesday.

Bank of Montreal has seen particular stress in the commercial real estate, manufacturing and transportation sectors. Still, about 70% of cases involving large provisions for losses have been in syndicated loan facilities with other banks also taking hits, Agrawal said.

“So, these aren’t unique to BMO,” he said.

He expects the bank to report elevated provisions for loan losses over the next one or two quarters before returning to its long-term average.

‘Silver Lining’

Apart from credit performance, the bank’s results “looked better than expected,” said Bank of Nova Scotia analyst Meny Grauman, adding that BMO reported positive operating leverage on lower expenses in the quarter. But that “silver lining” was unlikely to boost the shares on Tuesday, he said.

“After a big credit-focused miss in Q2, the market was laser focused on credit heading into Q3 reporting, and it is unfortunate that this is where the issues are once again,” Grauman wrote in a report. “The bottom line is that fears that BMO is in fact the outlier of this credit cycle will continue to weigh on the shares.”

Bank of Montreal, Canada’s third-largest bank by market capitalization, acquired regional player San Francisco-based Bank of the West last year, significantly extending its US footprint, as well as its exposure to potential credit losses in the market.

Its US personal and commercial banking unit posted adjusted earnings of C$539 million, down 7% from the prior year, as lower expenses weren’t enough to counter higher credit loss provisions and a decrease in non-interest revenue.

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