Bank of Montreal (TSX:BMO)(NYSE:BMO) is holding up well despite the economic headwinds facing the Canadian banks.
Let’s take a look at Canada’s oldest bank to see why it deserves to be in your portfolio right now.
1. Balanced revenue stream
Bank of Montreal has a balanced revenue stream with solid results coming from various segments in the Canadian economy as well as its growing U.S. business.
Fiscal Q1 2016 earnings from the Canadian personal and commercial operations accounted for 42% of adjusted net income. The division delivered Q1 profits of $530 million, a year-over-year gain of 5%. Loans rose 5% and deposits increased 6% compared with last year.
The company’s capital markets group contributed 21% of Q1 profits. This sector of the industry tends to be more volatile and can see results swing wildly from one quarter to the next. Adjusted net income for the first quarter rose 18% compared with Q1 2015.
Bank of Montreal’s wealth management operations kicked in 19% of Q1 adjusted net income. The division has grown in recent years and now serves clients in Canada, the U.S., Europe, and Asia. The results were slightly lower than the first quarter of last year.
The U.S. operations pretty much stole the show in Q1, and that trend could continue. Adjusted net income from personal and commercial banking activities south of the border accounted for 18% of adjusted net income and rose 29% year over year. When the currency tailwind is stripped out, the group still delivered a gain of 11%.
The bank has more than 500 branches in the United States and recently purchased the GE Capital’s transport finance business. The new assets should strengthen the company’s commercial banking operations and continue to deliver solid results.
2. Dividend safety
Bank of Montreal pays a quarterly dividend of $0.84 per share that yields 4.5%. The company has a long history of dividend growth and has paid its shareholders a piece of the profits every year since 1829.
3. Attractive valuation
The stock isn’t as cheap as it was last August, but the shares still trade at a reasonable 10 times forward earnings and just 1.3 times book value, which is lower than the five-year average of 1.6 times book.
4. Low risk
Bank of Montreal finished the first quarter with $7.4 billion in oil and gas loans, which represents about 2% of the company’s total loan book. Loss provisions are expected to drift higher if the energy sector remains under pressure, but more than 50% of the oil and gas loans are investment grade and the exposure is small compared to the overall lending portfolio.
The bank has $97.6 billion in Canadian residential mortgages. Insured loans represent 59% of the portfolio and the loan-to-value ratio on the remaining portion is 57%. This means house prices would have to fall significantly before the bank has any material losses.
Bank of Montreal is well capitalized with a CET1 ratio of 10.1%.
