Bank of Montreal (TSX:BMO)(NYSE:BMO) is often overlooked by bank investors, but that might be a costly mistake.
Here are the reasons why I think Bank of Montreal deserves to be on your radar.
1. Diversified revenue stream
Bank of Montreal’s revenue comes from a variety of segments in the market as well as its large operations located in the United States.
The Canadian personal and commercial group has the largest impact on the bottom line, delivering 42% of fiscal Q1 2016 net income. All of the Canadian banks are facing headwinds in the domestic economy, but Bank of Montreal managed to squeeze out a 5% year-over-year profit gain in the division as loans rose 5% and deposits increased 6% compared with Q1 2015.
The capital markets division contributed 21% of Q1 2016 net income. This segment tends to be the most volatile for the bank, and income can vary widely from quarter to quarter. Adjusted net income from the group was up 18% compared with the first quarter last year.
Wealth management supplied 19% of Bank of Montreal’s latest quarterly profits. The division has expanded significantly in recent years with international acquisitions providing a nice balance to the Canadian group. The Q1 2016 results were slightly lower than the same period in 2015.
South of the border, Bank of Montreal operates more than 500 branches serving nearly two million clients. The company recently purchased GE Capital’s transport finance business, which should help drive stronger growth in Bank of Montreal’s commercial banking segment.
The U.S. division contributed 18% of Q1 profits, bolstered by strong loan and deposit growth and a favourable exchange rate.
2. Dividend reliability
Bank of Montreal has paid a dividend every year since 1829. That’s an impressive track record, and one that investors should find comfort in at a time when some of Canada’s top dividend payers are slashing their payouts.
The current quarterly distribution of $0.84 per share yields a solid 4.25%.
3. Low oil and housing risk
Weak oil prices and high consumer debt have some investors concerned that the Canadian banks are in for a rough ride.
Bank of Montreal finished the latest quarter with $7.4 billion in oil and gas loans, representing about 2% of the total loan book. A further meltdown in the energy market will certainly drive loss provisions higher, but Bank of Montreal’s exposure is not significant, and more than half of the oil and gas portfolio is rated as investment grade.
The housing market is another area or concern for bank investors. Bank of Montreal finished Q1 with $97.6 billion in Canadian residential mortgages. Uninsured loans make up 41% of the portfolio and the loan-to-value ratio on that segment is 57%. This means the housing market would have to fall off a cliff before the bank incurs any significant losses.
Bank of Montreal remains well capitalized with a CET1 ratio of 10.1%.
