Bank of Montreal Results: Weak Domestic Banking

The trend of disappointing income growth from Canadian banking operations continues.

Iain Butler

Chief Investment Advisor, Motley Fool Canada Fool since November 2012 Iain Butler, CFA, is Lead Advisor on Discovery Canada 2017. He is also the Chief Investment Advisor for Motley Fool Canada and is the lead advisor on its flagship Stock Advisor Canada product. Before joining the Fool, Iain was a “buy-side” analyst and through this experience is well-versed in the idiosyncratic ways of the Canadian market. His investing interests are centred on scouring the market for interesting businesses that trade at reasonable prices and offer an appealing risk/reward relationship. Since joining the Fool in 2012, Iain dedicates each day to spreading Foolishness throughout this great country!

Published May 29, 2013 12:02 pm EDT

It was BMO’s (TSX:BMO,NYSE:BMO) turn to report this morning and based on the stock’s performance thus far, down 2.4%, the market didn’t like what it saw.

Adjusted EPS of $1.46 in the quarter was less than the consensus bet of $1.49/share, but perhaps more troubling was the continuation of the domestic slowdown theme that we have noted in both TD’s and Scotia’s reports.

Canadian retail banking revenues were flat year over year, but income growth was in fact negative. The table below summarizes the income growth trajectory for the bank’s Canadian P+C business.

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Consequences

This slowdown in domestic banking is having an impact on the bank’s return on equity (ROE). This metric stood at 14.5% at the end of Q2/13, down from 15.4% at this time last year.

Over the past 10 years, BMO’s quarterly ROE has averaged 15.5%, but has been as high as 21%. The erosion in this metric that has occurred, especially given the reasonable economic times that we’re in, is somewhat troubling.

Foolish Takeaway

Given today’s slide, BMO trades at a Price/Book multiple of 1.5. Its 10 year average is 1.9. With an ROE that is just 6% below its 10 year average, and a P/B multiple that’s more than 20% below its long-term average, it can be argued that downside in BMO’s stock is potentially limited. However, multiple expansion can’t be expected until earnings growth resumes. Therefore, upside is probably limited as well. This story holds for most of the Canadian banks.

Because of their significant weight in the S&P/TSX Composite Index, a lack of capital appreciation from the banks means the Canadian market could be stalled, making passive Canadian index investors vulnerable to disappointing returns in the coming years.

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Fool contributor Iain Butler does not own shares of any of the companies mentioned at this time. The Motley Fool doesn’t own shares in any of the companies mentioned.