Is BMO Stock a Buy at a Pullback Around $125?

Bank of Montreal stock trades 18% below all-time highs, increasing its forward yield to almost 5% in May 2024.

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Canadian bank stocks have trailed the broader markets in the last two years due to rising interest rates and a sluggish macro environment. Generally, when interest rates rise, demand for loans across verticals such as mortgage, automobile, and retail move lower, which impacts the top line for bank stocks.

Moreover, banks also have to account for higher delinquency rates as loan defaults tend to increase amid elevated bond yields. In the last two years, several TSX banks were forced to allocate significant resources towards provisions for credit losses or PCLs, resulting in an erosion of the bottom line.

One TSX bank stock that has trailed the index since 2022 is Bank of Montreal (TSX:BMO). Down 18% from all-time highs, BMO stock has returned 156% in the last decade after adjusting for dividends. However, the pullback has raised its dividend yield to almost 5%. Let’s see if BMO stock is a good buy at the current price.

How did BMO perform in fiscal Q1 of 2024?

In the fiscal first quarter (Q1) of 2024 (ended by January), BMO reported an adjusted net income of $1.89 billion or $2.56 per share, compared to a net income of $2.2 billion, or $3.06 per share, in the year-ago period. Its provision for credit losses almost tripled from $217 million to $627 million in the last 12 months, dragging profit margins lower.

BMO’s tepid performance in Q1 meant it ended the quarter with a return on equity (RoE) of 10.6%, down from the 12.9% in the prior-year period. The company’s loans were up 5% in Q1 due to a stellar performance across mortgages and commercial loans. Further, consumer deposits rose 11% due to strong retail and commercial deposits.

BMO strengthened its capital position by increasing its CET1 (common equity tier-one) ratio by 30 basis points. This ratio calculates the ability of a bank to withstand economic downturns, and a higher ratio is preferable.

BMO emphasized that the macro environment constrained revenue growth in recent months. However, the strength of its diversified businesses and strategic acquisitions allowed it to grow sales by 10% in the January quarter.

A focus on cost optimization

Similar to other companies, Bank of Montreal has introduced cost savings measures to shore up profitability. It announced an expense management program last year and aims to achieve run-rate cost synergies of US$800 million one year after it closes the Bank of the West acquisition.

It is also on track to deliver an additional $400 million of expense savings by the end of 2024 due to operational efficiencies. The banking giant claimed it reduced expenses by 4% sequentially and is focused on returning to positive operating leverage from Q2.

During the Q1 earnings call, BMO’s chief financial officer, Tayfun Tayzun, stated, “While impaired loss provisions have increased from very low levels, our consistent and disciplined risk-management practices and the expertise within our lending teams and the quality of our client selection are resulting in good overall credit performance in line with our expectations.”

Priced at 11 times forward earnings, BMO stock is cheap and trades at a discount of 7% to consensus price target estimates. After adjusting for dividends, cumulative returns may be closer to 12%.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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