Bank of Montreal – Back to basics

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

It has a large portfolio of products and service offerings in personal and commercial banking, wealth management, and investment banking and caters to a diversified range of customers including more than 12 million individuals, businesses, governments, and corporate customers across Canada and the U.S.

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 56% of net income, followed by the US (37%) and other countries (7%). 

The bank conducts its business through the operating groups: Canadian Personal and Commercial Banking (33% of 2Q’21 net income), U.S. P&C (23%), BMO Wealth Management (19%), and BMO Capital Markets (25%). Bank of Montreal has diversified its business across multiple U.S. and Canadian banking service lines.

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Key Investment Data

 

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Revenue Growth & Market Exposure

BMO’s personal banking segment serves customers with its wide range of products and service offerings, 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 bank is highly diversified by businesses and geographies. Canadian Personal and Commercial banking is BMO’s flagship business and continues to expand its share in key markets. Its wealth management business also maintains a #2 share in the Canadian ETF market. 

Bank of Montreal has an extensive network of more than 900 branches and ~3,200 ATMs across the US and Canada. 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.

With more than two centuries of existence, the Bank of Montreal has developed an extensive understanding of its client needs and behaviors. The bank is strongly focusing on technology deployment and is also looking at building new capabilities that will drive customer growth in the future. 

The bank’s operational performance remained resilient, despite impacts from the COVID-19 pandemic. Bank Of Montreal has a huge opportunity to expand in the digital market and registered a growth of 9% in digital sales this year.

The BMO’s diversified business model and very strong operating leverage led to revenue growth during the last quarter. PCL totaled $60 million, compared with $1,118 million. Bank of Montreal’s large North American platform and growing presence in international markets gives it an edge over the competition.

The bank is well-positioned to capture growth opportunities in the US segment driven by strength in commercial and personal banking, and Capital Markets. Its revenues have grown at 7%+ in the last decade.

Dividends

Bank of Montreal is a Canadian Dividend Aristocrat with a 192-year long dividend-paying history. The bank sports a handsome dividend yield of more than 3.3% and a reasonable payout ratio of 46%. The bank’s last dividend hike was 6% in 2019. 

Dividends paid over the last five-year period have increased at an average annual compound rate of 5.5%. It has a strong liquidity position with a CET1 ratio of 13%.

Strong investment in digital initiatives to drive client growth, solid customer focus, and a large footprint have helped Bank Of Montreal consistently deliver solid results. BMO 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. The bank has proven resilient earnings power. Its earnings have grown at 4%+ in the last decade.

BMO is focusing on optimizing efficiency and investing in areas where it has favorable market positions, like the North American Wealth Management business. The bank has reached a definitive agreement with Ameriprise Financial to sell its EMEA Asset Management business. 

It also sold its Private Banking business in Hong Kong and Singapore. A well-established and profitable flagship banking business in Canada, and diversified U.S. operations positions Bank Of Montreal well to capture growth opportunities.

BMO historical yield
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Competition

The Canadian personal and commercial banking segments are highly competitive. Bank of Montreal competes with other leading Canadian banks like TD Bank, Royal Bank, Scotiabank, Canadian Imperial Bank of Commerce, 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 - Diversified0.67126.18179.8212.8212.829.980.033.420.439044.320.102867Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:TDTDTD BankFinancial ServicesBanks - Diversified0.7782.95150.8410.6810.686.720.043.810.406043.160.130478Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:BNSBNSScotia BankFinancial ServicesBanks - Diversified0.7277.8794.3412.5512.556.270.054.620.572043.600.103168Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:BMOBMOBank of MontrealFinancial ServicesBanks - Diversified0.63123.5379.9213.5613.5610.450.033.430.465044.240.076757Tollbooth - UnregulatedNONOYESNOCanada1
TSE:CMCMCIBCFinancial ServicesBanks - Diversified0.62145.0764.5812.2312.2312.670.044.030.491045.840.086668Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:NANANational BankFinancial ServicesBanks - Diversified0.6395.4932.2312.8612.867.750.032.970.380042.840.098267Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:CWBCWBCanadian Western BankFinancial ServicesBanks - Regional0.6934.012.9610.7110.713.260.033.410.365041.160.093977Tollbooth - UnregulatedYESYESYESNOCanada1
TSE:LBLBLaurentian BankFinancial ServicesBanks - Regional0.4242.401.8411.5611.564.190.043.770.435041.600.037715Tollbooth - UnregulatedNONONONOCanada1

Bottom Line

The U.S. and Canadian economies are expected to rebound in 2021.

The bank expects economic recovery on the back of improving unemployment rates and commodity prices, and increased availability of a number of COVID-19 vaccines. BMO continues to strengthen customer loyalty and gain market share in key focus areas. 

A diversified business mix, leading market share, a reputed brand name, and a strong balance sheet form a huge moat around its business. Increased investment in expanding its footprint both digitally as well as across the US should start bearing fruits in the near future.

BMO Historical PE
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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.