Bank of Montreal (TSX:BMO) is up 26% in the past year. Investors who missed the rally are wondering if BMO stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and long-term capital gains.
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Bank of Montreal share price
Bank of Montreal trades near $144.50 per share at the time of writing. The stock was as low as $109 in the past 12 months and is just shy of the $152 record it reached in early 2022 at the peak of the post-pandemic rally in the Canadian bank sector.
Bank stocks have since been on a bit of a wild ride over the past three years. Most of the big TSX banks saw their share prices fall in 2022 and 2023 as the Bank of Canada and the U.S. Federal Reserve aggressively raised interest rates to fight inflation. The rebound started in late 2023 when sentiment shifted from fears of more rate hikes to expectations for rate cuts in 2024.
Higher interest rates are usually good for banks as they enable the banks to generate better net interest margins. The steep rise in rates over such a short period of time, however, put commercial and residential loan holders with too much debt in a difficult position, forcing the banks to raise provisions for credit losses (PCL). Markets also worried that the central banks would have to drive the economy into a recession to get inflation down to an acceptable level.
Bank of Montreal wrapped up its US$16 billion acquisition of California-based Bank of the West in early 2023, right before a few regional banks went bust in the United States. The company subsequently took heavy provisions on some large loans at Bank of the West, putting added pressure on BMO’s share price, taking it as low as $103 in the fall of that year.
On the positive side, the feared recession didn’t materialize and rate cuts in the second half of 2024 provided a new tailwind for bank stocks.
Risks
In 2025, the story is about uncertainty surrounding trade negotiations between the U.S. and its major trading partners, including Canada. Tariffs could push prices higher and potentially drive the U.S. and Canadian economies into a recession. This would likely cause a jump in job losses at a time when interest rates remain elevated. A rise in inflation would reduce the ability of the central banks to cut rates to stimulate the economy. Bank of Montreal has large operations in both countries, so it could see defaults surge if there is an extended economic downturn.
Should you buy now?
Near-term volatility is expected in the market, so I wouldn’t back up the truck right now. However, investors who already own the stock should hold on and look to add on any new weakness. You get paid a decent 4.5% dividend yield today to ride out the turbulence, and Bank of Montreal is positioned well to benefit from long-term expansion of the U.S. and Canadian economies once all the trade uncertainty gets settled.
