The Canadian banking sector has a reputation for stability, and the Big Five have proven time after time that this reputation is justified. During the great recession, Canadian banks recovered relatively faster than many other banks around the globe. And even though it wasn’t the case this time, especially compared to the neighbors across the border, one of the Big Five has beaten earnings expectations by a significant margin, outshining its relatively modest recovery.
The Bank of Montreal (TSX:BMO)(NYSE:BMO) has only recently recovered its pre-crash valuation, which is in-line with TD and Royal Bank of Canada. And even though it hasn’t won the “recovery” race, it might have won the earnings one.
First-quarter reporting season
Canada’s first-quarter fiscal reporting season has started, and BMO was the first in line to post its earnings, and it has done spectacularly. The net income grew by a whopping 27%, beating per-share earnings expectations by a significant margin by making $3.06 per share compared to the $2.15 per share that was initially speculated.
Much of this growth can be attributed to bank’s U.S. operations, which saw the most growth. The bank proudly announced its strong credit performance, thanks to loans’ credit quality and risk management. The capital market segment of the business also posted a 36% increase in earnings.
The most substantial growth segment was its U.S. operations, which posted a 67% year-over-year growth.
Should you buy it?
The Bank of Montreal, like most others in the Big Five, is almost fairly valued right now. The bank is also offering a juicy yield of 3.93% at a secure payout ratio of 51.64%. While the yield is not among the best in the banking sector, neither is its 10-year compound annual growth rate (CAGR), but it’s still a pretty decent buy.
If you follow Buffett’s methodology of counting on industry leaders and sticking with the best in its respective industry instead of diversifying, BMO might not present itself as a very attractive investment opportunity. But if other banks fail to outshine or come close to BMO’s earnings, the stock might develop an upward momentum as more people might start to take an interest in BMO’s future growth potential.
The rapidly growing U.S.-business front might also be a significant advantage because it opens the bank up to new expansion avenues. And it also means that local problems (like an impending housing market crash) might not impact that bank’s financials quite drastically.
The best time to buy the bank was a few months ago when it was still struggling to recover its pre-pandemic valuation, but if you are looking to add this bank to your portfolio, you might consider acting now instead of waiting for the time when optimism around the bank and its future earnings carry the valuation far away from the “fair” range.
Speaking of BMO’s latest earnings...
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Adam Othman has no position in any of the stocks mentioned.