Bank of Montreal (TSX:BMO) just hit a new high. Investors who missed the big rally over the past few months are wondering if BMO stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account or Registered Retirement Savings Plan (RRSP) focused on dividends and total returns.
Bank of Montreal share price
Bank of Montreal trades near $165 per share at the time of writing. The stock is up 47% in the past year and has now taken out the previous record high reached in early 2022.
The recent bounce is the third leg of a rebound that actually started in late 2023 when the Bank of Canada and the U.S. Federal Reserve decided to stop raising interest rates in their battle to get inflation under control. Higher interest rates are usually positive for banks, as they enable the banks to generate higher net interest margins. The steep increase in rates over such a short period of time, however, put pressure on businesses and households with too much debt. This led to fears that the economy would slide into a recession and defaults would surge.
The economic plunge didn’t materialize, and rate cuts from the central banks in the second half of 2024 helped ease pressure on borrowers. That being said, Bank of Montreal and its peers still had to increase provisions for credit losses (PCL) for customers who struggled to make their loan payments.
Earnings
Bank of Montreal just reported solid fiscal third-quarter (Q3) 2025 earnings. Adjusted net income came in at $2.4 billion in the quarter compared to $1.98 billion in the same period last year. Improvements in the American business drove the bulk of the gains, with adjusted net income rising 42% compared to fiscal Q3 2024. Wealth management operations also delivered a stronger performance, with adjusted net income up 21% year over year. Capital markets activities delivered a 12% gain in adjusted net income. Canadian personal and commercial banking, however, saw adjusted net income drop 5%. Higher PCL in the division and increased expenses offset a 6% jump in revenue.
Bank of Montreal reported PCL of $797 million in the quarter, down from $906 million in Q3 2024. The improvement came from lower provisions for credit losses in the U.S. commercial banking and capital markets groups. Investors will want to keep an eye on the PCL numbers in the coming quarters, especially in Canada.
Risks
American tariffs could push up inflation in the coming months as businesses start passing the higher costs on to consumers. This could lead to an economic slowdown while interest rates remain elevated. The U.S. Federal Reserve is expected to cut rates again as soon as next month. This would provide some relief for stretched borrowers, but a jump in unemployment could still reverse the trend of lower loan losses.
In Canada, unemployment has already risen in the past year. Tariffs and ongoing trade negotiations with the U.S. are forcing businesses and consumers to be cautious with their spending. A recession could drive a spike in job losses and push PCL even higher in the coming quarters.
Time to buy?
Bank of Montreal could continue to hit new highs in the coming months if Canada and the U.S. get a trade deal done in the near term and the economy avoids sliding into a recession. That being said, the stock has had a big run, and there are risks that things could get a bit messy for the economy heading into next year. The 4% dividend yield pays you well to ride out some turbulence if you already own the stock. New buyers might want to wait for a pullback to start a position.
