Internal Efficiency the Focus for BMO

Bank of Montreal is a diversified financial services provider and the eighth largest bank in North America by assets.

Bank of Montreal provides a large portfolio of products and services in personal and commercial banking, wealth management and investment banking to a diversified range of customers including more than 12 million individuals, businesses, governments and corporate customers across Canada and the United States. The bank also has a presence in a few countries in Europe, Asia, the Middle East, and South America. By geography, Canada is its largest market accounting for nearly 60% of net income, followed by the US (33%) and other countries (8%). Its strategic footprint spans strong regional economies. The US platform continues to grow and contributes over one-third of the bank’s earnings now.

The bank conducts its business through the operating groups: Personal and Commercial Banking (66% of 2019 net income), BMO Wealth Management (17%) and BMO Capital Markets (17%). Bank of Montreal has diversified its business across multiple U.S. and Canadian banking service lines. The bank is strategically located across strong regional economies and markets around the world and is in a good position to address the growing cross border needs of corporate customers. It had total assets over $850 billion as of January 2019.

Investment Data

Revenue Growth & Market Exposure

BMO’s personal banking segment serves customers with a wide range of products and services, including savings accounts, credit cards, mortgages, etc., while its commercial banking provides small business and commercial banking customers with a broad suite of commercial products and services like business loans, commercial mortgages, etc. The Canadian Personal and Commercial banking is the bank’s flagship business and accounts for two-thirds of the bank’s income.

With more than two centuries of existence, the Bank of Montreal has developed an extensive understanding of its client needs and behaviors. As one of Canada’s oldest bank, BMO enjoys a strong reputation and customer loyalty. The bank continues to make good progress in digitization and is deploying innovative measures such as faster product delivery, quicker loan adjudication, intuitive ATMs, etc. The bank is targeting to achieve an efficiency ratio of 58% by 2021. It ended the year with an efficiency ratio of 61.4% after absorbing the severance expense in Capital Markets. BMO is undertaking various measures spanning from organizational redesign and simplification to automating business processes for achieving desired efficiencies.

The bank continues to accelerate organic growth outside its core footprint expanding its presence and adding new capabilities. It adopts an integrated approach that recognizes the unique and evolving needs of small business customers across major industries.

Bank of Montreal’s large North American platform and growing presence in international markets gives it an edge over the competition. The bank is focusing on growing its presence in the U.S. and is already a recognized leader in the U.S. commercial banking segment. Total revenues in 2019 increased by 6% YoY. Bank of Montreal is anticipating some revenue headwinds in 2020.

Dividends

Bank of Montreal is a Canadian Dividend Aristocrat and boasts of the longest dividend paying history in Canada with 191 years of successive dividend payouts. The bank sports a very attractive dividend yield of more than 4% and has grown its dividend payout by 5% CAGR over the last five years. The latest dividend hike was 6% and the bank has a reasonable payout ratio of 48% currently. Its capital position remains strong with a CET1 ratio of 11.4%, supporting strong organic growth. The bank’s earnings have clocked a growth rate of 8% CAGR in the last decade.

Bank of Montreal targets to achieve 7%-10% earnings growth over the medium term which should easily translate into a low single-digit dividend growth rate in the future. Its diversified businesses should continue to deliver resilient and robust earnings. Strong investment in digital initiatives to drive client growth, solid customer focus, and a large footprint should also support strong results.

BMO expects macroeconomic conditions to remain constructive in Canada but the U.S. and Canadian economies are expected to grow modestly in 2020 amid continued uncertainty related to trade policies. Bank Of Montreal’s well-established and profitable flagship banking business in Canada and diversified U.S. operations places it well to capture growth opportunities. The bank’s diversification and earning strength cushions it from uncertainties in the environment. Bank Of Montreal has the lowest exposure to the Canadian housing market out of Big Five banks in Canada and its highly diversified geographic presence and increasing US footprint are strong positives. Its loans are well-diversified by geography and industry, as well. Solid GDP growth in Canada and an active U.S. business environment act as prominent tailwinds for Bank Of Montreal and should support the bank’s dividend growth streak in the future.

Competition

The Canadian personal and commercial banking segment is highly competitive. Bank of Montreal competes with other leading Canadian banks like TD Bank, Royal Bank, Scotia Bank, CIBC and National Bank. National Bank ranks amongst the six largest commercial banks in Canada, while CIBC caters to 11 million individual, small business, commercial, corporate and institutional clients in Canada, the U.S. and around the world. Scotiabank is a leading international financial services provider with a rich history of 185 years and Bank of Montreal is the eighth largest bank in North America by assets.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYieldYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:RYRYRoyal BankFinancial ServicesBanks - Diversified0.6795.47102.9812.2712.277.780.054.520.555344.320.118967Tollbooth - UnregulatedNONOYESNOCanada1
TSE:TDTDTD BankFinancial ServicesBanks - Diversified0.6862.0885.1412.0312.035.160.055.090.612443.160.141067Tollbooth - UnregulatedNONOYESNOCanada1
TSE:BNSBNSScotia BankFinancial ServicesBanks - Diversified0.7455.1550.329.759.755.660.076.530.636043.600.124768Tollbooth - UnregulatedNONOYESNOCanada1
TSE:BMOBMOBank of MontrealFinancial ServicesBanks - Diversified0.6580.2339.0111.5311.536.960.055.280.609244.240.090757Tollbooth - UnregulatedNONOYESNOCanada1
TSE:CMCMCIBCFinancial ServicesBanks - Diversified0.69101.9634.3011.8611.868.600.065.730.679145.840.106067Tollbooth - UnregulatedNONOYESNOCanada1
TSE:NANANational BankFinancial ServicesBanks - Diversified0.6569.5723.3611.5811.586.010.044.080.472542.840.109467Tollbooth - UnregulatedNONOYESNOCanada1
TSE:CWBCWBCanadian Western BankFinancial ServicesBanks - Regional0.6627.212.379.399.392.900.044.260.400041.160.097567Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:LBLBLaurentian BankFinancial ServicesBanks - Regional0.4728.631.2311.5711.572.470.065.590.647841.600.091325Tollbooth - UnregulatedNONONONOCanada1

Bottom Line

Bank Of Montreal continues to grow its loans and deposits at above market rate and expand its customer base. It should continue to reap the benefits of a diversified business mix, good operating discipline and a positive trend on expenses. The bank’s focus on growing its North American business, building customer loyalty, leveraging technology and efficiency should support future growth. A long and incomparable dividend history makes it a good choice for retirees.

BMO vs Indexes

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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