Bank of Montreal (TSX:BMO)(NYSE:BMO) is often pushed aside in favour of its larger peers, but investors might want to take a closer look at the company.

Earnings diversification

As the Canadian economy works its way through a rough patch, the market is evaluating which banks are most at risk if things really get nasty.

Bank of Montreal certainly relies on Canadian retail customers for a large part of its earnings, but the bank also derives a significant part of its revenues and profits from other sources, including its growing U.S.-based operations.

In the second quarter Bank of Montreal’s Canadian personal and commercial banking segment delivered adjusted net income of $487 million, which represented about 38.5% of the company’s earnings.

South of the border, the U.S. personal and commercial banking group saw solid 17% year-over-year commercial loan growth, and that helped the division contribute $219 million, or 17% of Q2 earnings. Weak commodity markets are hurting the Canadian economy, but the other side of the coin is a plus for Bank of Montreal’s results because every US$1.00 in earnings now converts into about CAD $1.30.

Bank of Montreal has a growing wealth management division with a strong international focus. This group added $265 million, or 21% of net income in the second quarter.

The company’s capital markets segment operates 30 offices around the world and offers a full range of products and services to corporate, institutional, and government clients. This group provided 23.5% of Q2 earnings.


The company had $93.4 billion of Canadian residential mortgages on the books as of April 30. This represents 43% of Canadian gross loans. Insured loans represent 61% of the portfolio and the loan-to-value ratio on the uninsured portion is 58%.

Only 2% of the company’s total loan portfolio is exposed to the oil and gas sector.

The low-risk profile of the loan book and the company’s strong Basel III CET1 ratio of 10.2% suggest Bank of Montreal is well positioned to ride out difficult times in the Canadian market.

Dividend growth and share buybacks

The company recently increased its quarterly dividend by two cents to $0.82 per share. This is good for a yield of 4.5%. The company has paid a dividend every year since 1829.

Bank of Montreal also has a strong share buyback program. In fact, the company repurchased and cancelled six million shares in the past two quarters.

Should you buy Bank of Montreal?

The company currently trades at just 10.3 times forward earnings and a very reasonable 1.4 times book value. The bank’s diverse revenue stream makes it an attractive pick, and you get a nice yield to boot.

Volatility might continue until the economy gives clear indications of a recovery, but long-term investors should be comfortable holding the stock right now.

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Fool contributor Andrew Walker has no position in any stocks mentioned.