Bank of Montreal (TSX:BMO) and TD Bank (TSX:TD) have made big bets on the U.S. market. Investors are wondering if these top TSX bank stocks are now undervalued after the latest slide in their share prices, partly caused by recent American bank failures.
Bank of Montreal
In February, Bank of Montreal closed its US$16.3 billion takeover of Bank of the West. The addition of the California-based regional bank added more than 500 branches and 1.8 million customers. Bank of Montreal now ranks as the eighth-largest bank in North America by assets and has a significant market presence in three of the top five U.S. markets and a foothold in 32 American states.
The bank used the cash hoard it built up during the pandemic to make the purchase. Investors are concerned, however, that Bank of Montreal paid too much. Management negotiated the deal near the peak of the post-pandemic valuation in banks and announced the agreement in late 2021. Rising interest rates through 2022 pushed down multiples in bank stocks, as investors started to worry that a major recession could emerge in 2023 or 2024. Bank of Montreal still closed the deal for the agreed price at the start of February 2023, but the bank has since watched bank stocks get hammered after high-profile bank failures occurred in March.
At the time of writing, Bank of Montreal trades near $123 per share. That’s up from the 12-month low around $115 but still down from the $140 it fetched at this time last year.
Investors who buy the stock at the current price can get a 4.6% dividend yield. While the Bank of the West purchase now appears expensive, Bank of Montreal should still benefit in the long run from U.S. economic growth.
Reports in late 2021 suggested that TD had lost the bidding war for Bank of the West to BMO. As such, it wasn’t a surprise when TD announced at the end of February 2022 that it was also using its excess cash to try to make a large purchase in the United States. The US$13.4 billion takeover for First Horizon would build on TD’s existing network of branches that runs from Maine right down the east coast to Florida. First Horizon operates more than 400 branches in the southeastern states.
The all-cash deal works out to US$25 per share. Unfortunately, the meltdown in bank stocks in March 2023 sent First Horizon’s stock price as low as US$15, and it still trades at just above US$18 at the time of writing.
The market expects TD to either abandon the deal or renegotiate a better price. It will be interesting to see how the saga plays out in the coming weeks or months.
TD stock trades near US$83.50 per share at the time of writing. That’s up from the March low of about $77 but still down from the $93 it hit in February before chaos arrived in the American bank sector in March.
At the time of writing, investors can get a 4.6% dividend yield.
Bargain hunters might be moving back into the stock on the assumption the First Horizon deal could be scrapped. If that were to occur, TD would find itself sitting on a mountain of excess cash that it could use to make another strategic purchase at potentially a better price, or even deploy the fund to shareholders through a large share buyback and dividend hike, or special distribution.
Is one a better pick today?
Bank of Montreal and TD are solid companies that should deliver decent long-term total returns.
Bank of Montreal’s big U.S. bet is done. On one hand, this provides clarity for investors. Whether or not the Bank of the West deal proves to be positive for investors, however, is yet to be seen.
TD might be able to get the U.S. assets it wants at a much better price. In this scenario, contrarian investors might prefer to buy TD stock while it is out of favour. At some point in the near term, the situation will get sorted out, and the stock could surge once that occurs.