Is 2014 a Turning Point for Bank of Montreal?

Bank of Montreal (TSX:BMO)(NYSE:BMO) CEO Bill Downe has described 2014 as the likely “inflection year” for the bank.

So far, so good. Today BMO reported results for the first quarter of 2014, and on an adjusted basis, the bank earned $1.61 per share, beating analyst estimates by nine cents. The top line certainly helped causes, increasing 8% year over year. Despite the good news, BMO did not raise its dividend, leaving it at 76 cents per share.

One particularly nice note for the bank was its performance in the United States, which for the past three years has mostly been disappointing. BMO bought Wisconsin-based Marshall & Ilsley Corp for $4.1 billion in 2011, but turning around that bank’s operations has been a struggle. Mr. Downe has said that the economy has been weak in the U.S. midwest, where BMO’s American arm is focused.

But in the first quarter of 2014, net income increased to U.S. $153 million, $55 million more than in the last quarter of 2013. Credit losses, which were abnormally high in Q4/2013 at $92 million, dropped down to $18 million this quarter.

Despite the good news, BMO’s challenges remain the same. Canadian banking is still extremely lucrative, but challenged for growth. Meanwhile U.S. banking is where the growth opportunities are, but it’s not nearly as profitable. To put this in perspective, the Canadian banking operations have 2.3 times the revenue of U.S. banking, but nearly three times the net income.

Foolish bottom line

BMO’s conundrum is very similar to that of Toronto Dominion Bank (TSX:TD)(NYSE:TD). TD’s situation is a little bit different, concentrating on the east coast while BMO is focused on the Midwest. TD is also placing a bigger bet on the United States — most people don’t realize that TD has more branches in the U.S. than Canada. But both banks are facing the same types of challenges south of the border, and will likely never be as profitable there as they are in Canada.

Despite these challenges, BMO remains a relatively safe way to bet on a recovery in the U.S. midwest. The shares trade at just under 12 times earnings, and the dividend yields over 4%. Earnings should get a boost as interest rates rise in both countries, which ideally will support a growing dividend too. And if this is indeed BMO’s “inflection year”, the bank’s results could continue to deliver positive surprises.

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Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

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