Bank of Montreal (TSX:BMO)(NYSE:BMO) is rarely touted as a top pick among the Canadian banks, but the company’s balanced revenue stream is starting to catch the attention of investors.
Let’s take a look at Canada’s oldest bank to see if it is a good pick right now.
Solid earnings
Bank of Montreal delivered strong results in Q3 2015, which wrapped up at the end of July.
Adjusted net income for the quarter was $1.23 billion, up a solid 6% compared with the same period last year. The company saw strong results in personal and commercial banking on both sides of the border, as well as in the wealth management segment.
Canadian personal and commercial banking reported net income of $557 million, up 6% over Q3 2014. Loans in the group increased by 3% and deposits rose 6%.
Bank of Montreal also has a strong U.S.-based retail operation. Year-over-year adjusted net income from the American group rose 36% to $186 million in the third quarter, driven by double-digit loan growth in the commercial and industrial segment of the business and a strong gain in the U.S. dollar against its Canadian counterpart.
Wealth management is an area of growth for the company, and that group contributed $233 million in net income for the third quarter, up 8% over the same period last year. Assets under management increased by 13%.
Bank of Montreal also has a large capital markets operation, and that group saw its year-over-year net income drop 11% to $274 million in Q3. The wholesale banking segment tends to be the most volatile, and earnings can fluctuate significantly from one quarter to the next.
Overall, the company did quite well considering the headwinds facing the Canadian banks.
Low risk
Canadian mortgages and struggling energy companies are top-of-mind concerns right now for bank investors.
Bank of Montreal finished Q3 with $95.4 billion in Canadian residential mortgages on its books. The portfolio is 60% insured and the loan-to-value ratio on the remaining mortgages is 58%.
This means the housing market would have to drop significantly for Bank of Montreal to incur serious losses. Most analysts expect house prices to pull back gradually, so Bank of Montreal should be in good shape.
On the energy side, the bank’s oil and gas exposure represents about 2% of the total loan book. Provisions for losses could creep up if energy prices don’t rebound, but the overall effect should be minimal.
Bank of Montreal is well capitalized with a CET1 ratio of 10.4%.
Dividend stability
The bank pays a quarterly dividend of $0.82 per share that yields about 4.4%. Investors have received a distribution every year since 1829, so there shouldn’t be any concern about the reliability of the payout.
Valuation
Bank of Montreal currently trades at 10.4 times forward earnings. The stock isn’t as cheap as it was in late August, but the company is still reasonably priced.
Should you buy?
Bank of Montreal’s diversified revenue stream is attractive in the current market, and investors should see the U.S. and wealth management operations become more prevalent in the coming years. As a long-term dividend pick, Bank of Montreal is a solid choice.
