Market volatility has taken a sharp turn in recent days. The sudden news of Silicon Valley Bank failing over the weekend has rekindled images among seasoned investors of the early days of the Great Recession. As a result, many investors are contemplating whether it’s the right time to buy a bank stock like Bank of Montreal (TSX:BMO).
Let’s try to answer that question.
The focus needs to be on the long term
When a bank does fail, it can send a shockwave throughout the financial system. We’re already seeing a slew of bank stocks down 5% or more, in some cases, following the events of the past few days. And Canada’s big banks aren’t immune to that drop either.
In the case of BMO, as of the time of writing, the bank is down 6% in the past week. Looking out over a longer 12-month period, the stock is down over 17%.
This isn’t too surprising, given the volatility we’ve seen as a result of the rapidly rising interest rates and inflation. If anything, that dip should be a key moment for Canadian investors to buy BMO at a very discounted rate, and here’s why.
Canada’s banks tend to fare much better than its U.S.-based peers during a downturn. This is true for a variety of reasons, but two key points are the more regulated Canadian market and the well-diversified nature of the big banks.
It’s also worth noting that while Silicon Valley may be the second-largest bank failure in U.S. history, there are few, if any, parallels with BMO and its big bank peers.
Silicon operated like a niche player, attracting customers that were mainly startup businesses and wealthy individuals from the tech sector. As the market began to pull back and interest rates continued to rise, many of those wealthy customers started to pull their money out.
That run on the bank, followed by a lack of outside investors to rely on, left the bank insolvent.
BMO, however, is a well-diversified global banking behemoth. The company generates revenue through several different segments in Canada and abroad.
In short, investors should focus on the long-term potential of BMO and not on any market fear.
What makes it the right time to buy BMO?
Apart from the discounted position that BMO is currently in, there are a few other compelling reasons for investors to consider right now.
First, the bank is well provisioned for loan losses. In the most recent quarter, BMO reported a provision for credit loss (PCL) of $217 million. By way of comparison, during the same period last year, BMO reported a $99 million recovery of the provision for credit losses.
Next, despite its conservative and well-regulated approach, BMO is expanding. Last month, the bank completed the acquisition of U.S.-based Bank of the West. The deal adds 1.8 million new customers across multiple new state markets. Those customers also bring with them billions in loans and deposits.
Finally, let’s talk about income. BMO is a great dividend stock and has been paying out dividends for almost two centuries — longer than any other bank in Canada.
Today, that yield works out to a juicy 4.79%, which means that a $30,000 investment in BMO will generate an income of over $1,430. Again, investors should keep focusing on the long-term gains rather than any short-term volatility.
Final thoughts
No investment is without risk, and that includes BMO. Fortunately, in the case of BMO, the bank offers a well-diversified investment that can appeal to both growth and income-seeking investors.
In my opinion, it is the right time to buy BMO now. The bank is a great long-term investment that should be a core holding in any well-diversified, long-term portfolio.
