(Bloomberg) -- Bank of Montreal’s capital reserves will get a boost in the fourth quarter after the lender won a legal victory over its involvement in a multi-billion-dollar Minnesota Ponzi scheme.
The Canadian bank will record an extra C$875 million ($644 million) after-tax in the fourth quarter, it said in a statement. The move reverses an earlier provision it took in a case related to the scheme orchestrated by disgraced businessman Tom Petters.
BMO took the provision in 2022 after a jury found its subsidiary BMO Harris Bank liable for the actions of a predecessor bank. Petters, a Minnesota businessman, convinced investors he and his associates were financing the purchase of consumer electronics for resale to big-box retailers, but he never bought any and used money from new investors to pay returns to older ones. He was convicted of fraud in 2009 and sentenced to 50 years in prison.
Petters originally used an account at National City Bank, which was bought by Milwaukee-based Marshall and Ilsley Bank in 2001. M&I was acquired by BMO Harris in 2011.
The plaintiff in the lawsuit, the bankruptcy trustee for Petters’ former company, was barred from recovering funds in the case, according to a judgment Thursday from the US Court of Appeals for the Eighth Circuit.
Capital Support
The reversal should help support BMO’s regulatory capital levels, said Paul Gulberg, an analyst with Bloomberg Intelligence.
Royal Bank of Canada analyst Darko Mihelic estimated it will increase BMO’s reported earnings per share by C$1.20 in the fourth quarter and bolster its common equity tier 1 capital ratio. BMO’s regulatory ratio should remain stable at 13%, versus a previously projected decline to 12.6%, he said.
“We believe there is a small chance that this verdict gets appealed, but we believe that BMO reversing its provision shows confidence that this will likely not be the case,” Mihelic wrote in a report Friday.
BMO faced a round of analyst downgrades last month after reporting higher-than-expected provisions for loan losses, fueling concerns that it is overexposed to US commercial lending.
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