Despite the concerns of investors and analysts, Canada’s banks continue to perform strongly. Even slow economic growth and the protracted slump in crude has not significantly impacted their performance.
In the latest bank-reporting season, one standout performance was Bank of Montreal (TSX:BMO)(NYSE:BMO). The bank’s ongoing strength, particularly its ability to deliver solid results in a difficult operating environment, makes now the time for investors to add it to their portfolio.
Now what?
Firstly, regardless of the headwinds facing Canada’s economy, Bank of Montreal reported an increase in net income for the quarter.
Adjusted net income for the first six months of 2016 rose by 7% compared with the equivalent period in 2015. This can be attributed to an increase in loans and deposits, which grew by 12% and 5%, respectively, year over year.
The majority of this growth came from its Canadian and U.S. banking operations. While Canadian banking reported a modest 8% rise in net income for the period, U.S. personal and commercial banking reported a massive 29% spike in net income.
This can be attributed to the ongoing strength of the U.S. economic recovery, which saw a marked uptick in demand for credit. Such strong growth for its U.S. operations can only continue.
You see, the Fed is considering hiking interest rates either this month or next, and any increase in interest rates bodes well for banks operating in the U.S. A rate hike essentially means the banks can generate higher margins on loans and receive greater yields on funds invested from customer deposits.
Secondly, Bank of Montreal’s U.S. operations are an important growth lever.
For some time, Canadian banks such as Bank of Montreal and Toronto-Dominion Bank (TSX:TD)(NYSE:TD) have been derided for their forays into the U.S. because this market is considered to be one of the most difficult to crack.
Nonetheless, it is starting to pay off handsomely for both banks because of the growing strength of the U.S. economy. Not only does GDP continue to grow strongly, coming in at 1.4% for the first quarter 2016, which is a 60 basis point increase compared with the same period in 2015, but housing and employment also continue to recover.
It is these last two factors that are of particular importance to the growth prospects of banks operating in the U.S., where higher employment and stronger demand for housing are key drivers of demand for credit.
Finally, the bank hiked its dividend by 2% compared with the previous quarter.
Bank of Montreal is rewarding investors with a juicy 4% dividend yield, which is sustainable with a conservative payout ratio of 50%. These regular dividend payments coupled with a solid yield and regular dividend hikes will see patient investors rewarded with a growing income stream as they wait for the banks’ stock prices to appreciate.
So what?
Bank of Montreal is a solid addition to any investment portfolio because of its solid growth prospects and juicy sustainable dividend yield. What makes it even more appealing is that it is trading with some attractive valuation ratios, including a share price that is a mere of 1.5 times its book value per share and 12.5 times its earnings, making now the time for investors to add it to their portfolios.
