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Should Bank of Montreal Be a Top Pick for Your Portfolio?

Bank of Montreal (TSX:BMO)(NYSE:BMO) is often ignored when investors are looking to add a bank stock to their portfolios.

That might begin to change.

Earnings

Bank of Montreal reported solid fiscal Q4 2015 adjusted net income of $1.26 billion, up 14% over the same period last year. Net revenue rose 9% and adjusted earnings per share increased by 17%.

The numbers are impressive given the economic headwinds facing the Canadian banks.

Bank of Montreal’s Canadian personal and commercial banking operations continue to perform well. Q4 net income hit $561 million, up 7% compared with Q4 2014. Loans rose 4% and deposits increased by 5%.

The U.S. business stole the show with adjusted net income up 22% on the back of very strong growth in commercial and industrial loans. Bank of Montreal operates more than 600 branches that are primarily located in the U.S. Midwest.

The bank continues to benefit from a recovery in the American economy as well as the strong U.S. dollar, and the recent acquisition of GE Capital’s transportation finance business should boost results next year.

Bank of Montreal’s capital markets group tends to be the most volatile part of the business. Year-over-year Q4 net income in the segment was $243 million, up 27% compared with last year but 11% lower than Q3 2015.

The wealth management operations have expanded in recent years, and the company is reaping the benefits of those acquisitions. Adjusted net income from the group rose 8% compared with Q4 2014. Assets under management increased by 9%.

Mortgage and energy-sector risk

Bank of Montreal finished Q4 with $97 billion in Canadian residential mortgages. Insured mortgages represent 58% of the portfolio and the loan-to-value ratio on the remaining mortgages is 57%.

Alberta represents 16% of the overall holdings.

Loans to oil and gas companies represent 2% of the bank’s total loan portfolio.

A meltdown in the housing market would certainly impact the bank, but most analysts expect the pullback to be gradual. If that’s the case, Bank of Montreal is positioned well to ride out the slowdown.

As for the energy sector, investors could see loan provisions start to creep up, but the overall exposure is limited.

Dividends

Bank of Montreal just increased its quarterly dividend to $0.84 per share. The new payout provides a yield of 4.3%. The dividend hike should be viewed as a vote of confidence in the earnings outlook for the coming year.

The bank has given investors a share of the profits every year since 1829.

Should you buy?

Bank of Montreal has a diversified revenue mix and gives investors exposure to a strengthening U.S. market. The stock trades at an attractive 10.4 times forward earnings and offers a very safe dividend. Investors with a buy-and-hold strategy should feel comfortable making the stock a top bank pick.

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

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