Canada’s banking sector remains solid, despite coming from a challenging fiscal 2022. Many fear the underperformance of big bank stocks would last longer because of the interest rate-induced recession. Nonetheless, there’s no reason to doubt their viability as passive-income providers for dividend investors.
However, suppose you’re betting on a genuinely resilient investment. In that case, Bank of Montreal (TSX:BMO) is the hands-down choice, not the higher-yielding Canadian Imperial Bank of Commerce (TSX:CM).
Dividend pioneer
BMO is TSX’s dividend pioneer whose track record is just six years short of two centuries or 200 years. At $119.95 per share (+0.01% year to date), the current dividend yield of 5.44% is 8% higher than the previous year. BMO likewise unseated Bank of Nova Scotia as the third-largest Canadian bank.
The $84.36 billion bank had a historic moment on February 1, 2023, when it completed the acquisition of Bank of the West in the United States and became the eighth-largest bank in North America. Its chief executive officer (CEO) Darryl White said the deal is an integral part of BMO’s regional growth strategy.
Apart from having an additional 500 branches across the border, BMO gains a strong position in three of the top five U.S. markets, plus a footprint in 32 states. Moreover, the expanded national specialty commercial businesses and a digital banking platform cover all 50 states.
In the first quarter (Q1) of fiscal 2023, net income dropped to $247 million from $2.93 billion in Q1 2022, primarily due to the Bank of the West-related charge. BMO will focus on integrating the systems and achieve US$670 million in cost savings. White added, “In the early days of owning the asset, my confidence level has gone up on those revenue synergies.”
According to management, expect the bank to reshape its balance sheet in the quarters ahead. While earnings declined significantly during the quarter, BNS analyst Meny Grauman said investors should focus more on the upside from the US$16.3 billion deal.
Meanwhile, market analysts covering the bank stock are bullish and have a 12-month average price target of $139.81 (+17.5%). BMO is a must-own asset for people with a long-term time horizon or building retirement wealth.
Some red flags
Income-thirsty investors will gravitate towards CIBC for its juicy dividends. Besides the cheaper share price of $56.43 (+4.6% year to date) compared to BMO, the yield is 6.03%. Also, the dividend is safe, given the 65.51% payout ratio. The $51.44 billion bank is Canada’s fifth-largest financial institution.
I’m not saying you should run from CIBC entirely, although there are red flags to consider. Some market analysts say the higher exposure to Canada’s housing market means higher volatility in the short term. In Q1 fiscal 2023, net income fell 77% year over year, primarily due to a $1.17 billion legal provision.
Cerberus Capital Management accused CIBC of non-payment of a limited recourse note overdue since the financial crisis. The Canadian bank paid US$770 million to settle all legal claims.
Ultimate bank stock
The fundamentals in Canada’s banking sector remain resilient, although there could be potential obstacles or risks in fiscal 2023. But if you want your money to be safe, BMO is the ultimate bank stock to buy this month.
