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Is Bank of Montreal or Toronto-Dominion Bank the Best U.S. Recovery Bet?

The economic recovery in the U.S. continues to gain steam. Manufacturing is rebounding, jobs are coming back, stock markets are at record highs, and the U.S. dollar is gaining against international currencies.

Bank of Montreal (TSX: BMO)(NYSE: BMO) and Toronto-Dominion Bank (TSX: TD)(NYSE: TD) have built extensive operations in the U.S. and it looks like those investments are paying off.

Which one is the best choice for investors who want to invest in the U.S. rebound? Let’s take a look at the U.S. operations of both Bank of Montreal and Toronto-Dominion bank to see how they are doing.

Bank of Montreal

Bank of Montreal (BMO) entered the U.S. market 30 years ago when it bought Chicago-based Harris Bank. The U.S. operation doubled in size in 2011 when BMO bought Wisconsin lender Marshall & Ilsley Corp. for $4.1 billion.

At the time of the Marshall & Ilsley deal, investors were concerned that Bank of Montreal could be making a big mistake by betting big on the competitive U.S. market where Canadian rival Royal Bank of Canada had tried to build a U.S. business for 11 years and failed miserably.

Today, it looks like the double down is finally paying off. In its Q3 2014 earnings statement, Bank of Montreal reported net income of $147 million from its U.S. operations. The personal and commercial banking operations in the U.S. saw earnings per share increase by 8% year-to-date compared to 2013.

The area investors should pay attention to is commercial banking, where loan growth was up 18% in the third quarter.

Two economic reports released September 2 show increasing growth in the U.S. midwest, where Bank of Montreal is focused.

The Mid-America Business Conditions Index compiled by Creighton University indicated midwestern supply managers reported growth in August export orders for the ninth consecutive month.

The Institute for Supply Management (ISM) also said U.S. factories reported growth in August. The ISM index reading reached 59, the highest in three years. Manufacturing is a core part of the economy in the midwest states.

In the Q3 2014 conference call, BMO’s CEO, Bill Downe, told analysts that the bank is seeing improved revenue trends in the U.S., despite a continued low interest rate environment.

The U.S. operations currently represent about 15% of BMO’s total profits. Investors should expect the BMO Harris Bank division to contribute more meaningfully to earnings moving forward as the brand expands its reach and the U.S. economic rebound continues to progress.

Toronto-Dominion Bank

TD Bank (TD) has a massive 1300-branch network in the U.S. that serves eight million customers from Maine in the northeast all the way down through the mid-Atlantic region, metro D.C., the Carolinas, and even Florida.

In fact, TD Bank is now one of the 10 largest banks in the U.S.

In its Q3 2014 earnings statement, TD reported U.S. retail earnings of US$449 million, a 4% year-over-year increase.

This represents about 25% of the company’s profit.

In the Q3 report, Mike Pedersen, Group Head for U.S. Banking said, “Customer acquisition and deposit and lending growth were strong, with business lending especially good in the third quarter. The U.S. banking environment continues to face headwinds, but we remain focused on building the franchise and delivering legendary customer experiences.”

The bottom line

Both Bank of Montreal and Toronto-Dominion Bank are making progress in the U.S. and will benefit from the continued recovery in the U.S. economy.

Investors looking for a bigger U.S. exposure in their bank stocks should pick TD. If you believe the U.S. manufacturing renaissance is upon us, then BMO might be a better bet for the long term.

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