UPDATE 2-Canada's BMO profit misses due to bigger loan loss reserves, shares sink

(Adds share price, compares with estimates)

By Pritam Biswas and Nivedita Balu

Feb 27 (Reuters) - Bank of Montreal on Tuesday reported first-quarter profit below analysts' estimates, hurt by larger-than-expected funds set aside for potential credit losses in a turbulent economy, sending its shares tumbling.

Shares were down 4.5% at C$121 in midday Toronto trading. If losses hold, shares could see their worst day since May 2020.

BMO and peer Bank of Nova Scotia

also warned of muted growth

at home until the central bank begins lowering sky-high interest rates, a situation that has forced lenders to set aside big rainy day funds.

Geopolitical pressures and a high interest rate environment have darkened the economic outlook for Canada, prompting lenders to shore up reserves in case customers default on their loans.

Provisions for credit losses rose to C$627 million ($463.86 million) from C$217 million in the year-ago period. Analysts had forecast C$508 million, according to LSEG data.

"A challenging quarter for BMO ... driven by a surprising large miss on the top line, most of which was in the insurance business, and a higher-than-expected reserve build for performing loans," KBW analyst Mike Rizvanovic said.

BMO said it was also impacted by a C$313 million special assessment fee by the U.S. Federal Deposit Insurance Corporation and C$136 million in losses from the sale of its recreational vehicle loans portfolio.

The FDIC has charged banks a fee to replenish its deposit insurance fund, which was drained of $16 billion by the collapse of Silicon Valley Bank and Signature Bank in the United States last year.

Multiple hikes by the Bank of Canada allowed BMO to charge higher interest on loans, boosting its net interest income (NII), which is the difference between what banks earn on loans and pay out on deposits.

NII rose 17% to C$4.72 billion in the reported quarter.

The bank reported a quarterly adjusted net income of C$1.89 billion ($1.40 billion), or C$2.56 per share, compared with C$2.16 billion, or C$3.06 per share, a year earlier. Analysts were expecting C$3.02 per share. ($1 = 1.3517 Canadian dollars) (Reporting by Pritam Biswas in Bengaluru and Nivedita Balu in Toronto; Editing by Savio D'Souza, Shinjini Ganguli and Mark Porter)