* U.S. bank, loan losses flagged by Moody's
* BMO says has reduced exposure to trading losses
* Shares down 1.5 pct as Toronto financials sag
TORONTO, Oct 23 (Reuters) - Moody's credit rating agency said late on Thursday it may downgrade Bank of Montreal (BMO.TO), Canada's fourth-largest bank, due to concern about its U.S. operations, trading business and loan losses.
While the Toronto-based bank is well regarded compared with many global competitors, who suffered more from the credit crisis, Moody's said the poor performance of BMO's Harris Bank unit in the United States has hurt profitability.
"BMO's review for possible downgrade comes at a time when the bank has persistently reported lower risk-adjusted profitability, relative to similarly rated peers due to net losses in its U.S. businesses. Furthermore, a prolonged period of above average credit costs could intensify pressure on BMO's profitability," Moody's senior vice-president, Peter Routledge, said in announcing the review.
BMO shares were down 1.5 percent at C$52.24 at midday Friday on the Toronto Stock Exchange. All of the big banks were lower and the broader financial index was off 1.1 percent.
Moody's rates most of BMO's debt at Aa1, which is considered high with relatively low risk. It downgraded Harris's "bank financial strength rating" to C+ from B-.
While Canada's four biggest banks have emerged from the financial crisis at the top of the global banking heap, having remained largely profitable throughout, most have been hit by losses in their international banking business and all have had suffered from a jump in bad loans.
BMO, which has focused on a geographical footprint across Canada and the U.S. Midwest, has particularly felt the sting of U.S. banking woes, because credit losses south of the border have been much higher than in Canadian retail banking.
Harris NA has reported net losses in four of the last five quarters, while its U.S. holding company, Harris Financial Corp, has reported five consecutive quarters of net losses, Moody's noted.
On Friday, Bank of Montreal argued it has taken steps to reduce its exposure to losses from trading activities, and said it expects to outshine its peers this credit cycle.
"We have positive momentum across all of our businesses, including Harris -- which is a strong competitor," spokesman Paul Deegan said.
"While credit losses remain elevated, as discussed in connection with our Q3 results, we continue to believe that we will perform better than our peers across our different portfolios in this credit cycle."
In August, BMO said the amount of money it set aside to cover bad loans fell in the third quarter, to C$417 million ($397 million). The quarterly profit of C$557 million exceeded market expectations.
Banking analysts believe the worst of the credit cycle has likely passed, and while capital markets revenues are viewed as volatile, most banks -- including BMO -- have turned handsome trading profits as global markets roared back to life.
Edward Jones analyst Craig Fehr said while credit losses have probably not yet peaked, since they lag an economic recovery, financial sector investors are already looking past concern about loan losses towards growth opportunities.
"In some respects this (ratings move) may be a bit backward looking, in terms of this is the fallout from the issues that we were experiencing six months ago," Fehr said.
The question will soon be which of Canada's biggest four banks -- Royal Bank of Canada (RY.TO), Toronto Dominion Bank (TD.TO), Bank of Nova Scotia (BNS.TO) and BMO -- are best able to deploy the massive capital they are sitting on to grow their business through acquisition or organic expansion.
On that count, BMO may lag the others, Fehr said.
"I think we're going to get to a point in 2010 where the banks are going to realize they have a bit more visibility and they do have excess capital they can put to work, and I think investors want to own the companies that have the best growth prospects to put that cash to work and I don't think BMO is at the top of that list," Fehr said.
($1=$1.05 Canadian) (Reporting by Andrea Hopkins)