Banking stocks: they’re not the most glamorous equities on earth, but they can produce a lot of income.
Many investors shy away from bank stocks, either out of fear of bank failures (see March 2023), or a lack of interest in their “slow and steady” returns.
Both categories of investors are making mistakes. Banks have performed better than every other “value” sector over the last 10 years. If the current rich valuations of big tech stocks lead to a correction, banks may even get to the point where they’re outperforming big tech.
It’s true that banks in general can be risky. U.S. banks sometimes fail, and European banks often deliver decades of negative returns. Canadian banks are a different story. Thanks to the strict regulations and barriers to entry in the Canadian market, they rarely fail or deliver inferior long-term returns. Accordingly, they are often good investments. In this article, I will explore two bank stocks that I’ve been buying in 2023.
Bank of Montreal
Bank of Montreal (TSX:BMO) is a Canadian bank operating in Canada as well as the United States. It has a strong position in retail banking in the U.S. Midwest. It also has a respectable capital markets business.
Like many Canadian banks, Bank of Montreal is fairly cheap. At today’s prices, it trades at the following:
- 10 times earnings
- 2.8 times sales
- 1.2 times book value
- 7.8 times operating cash flow
This is a pretty modest valuation. And yet, the Bank of Montreal has a major growth catalyst under its belt:
The recent acquisition of Bank of The West, which the company bought from BNP Paribas.
Bank of the West has about $100 billion in assets and does $1 billion a year or so in net income. As BMO’s second-quarter earnings release shows, Bank of the West is making a major contribution to the bank’s earnings. In the most recent quarter, BMO delivered the following:
- $2.2 billion in net income, up 1.3%
- $2.93 in adjusted EPS, down 9.2%
- Return on equity of 12% compared to 15.6%
- $8.44 billion in revenue, down 9.4% year over year but up 30% compared to the first quarter
As you can see, the company’s business declined on a year-over-year basis but grew tremendously on a sequential basis. That was largely due to the earnings contribution of Bank of the West. Had Bank of the West not contributed $1 billion in revenue in the second quarter, then the whole-firm decline in revenue would have been 20% rather than 9%. The 30% sequential jump in revenue, likewise, would have been 15% rather than 30%. So, Bank of the West is already contributing to growth at BMO. I’m expecting more good things from BMO stock in the year ahead.
TD Bank
Toronto-Dominion Bank (TSX:TD) is another bank stock I own. I held this one for many years, unlike Bank of Montreal, which I only bought recently. TD Bank did much better than Bank of Montreal last quarter, with positive growth in adjusted earnings. Thanks to its large and growing U.S. retail business, it is doing better than most Canadian banks this year. Also, TD Bank has excellent capital and liquidity ratios, which means it has enough liquid assets to cover deposits. If you’re looking for safety and growth in one package, TD Bank stock could be just what the doctor ordered.
