The third quarter ended July 31, 2025 saw a common trend in the Canadian banking sector: a reduction in provision for credit losses (PCL). The big six Canadian banks earn most of their income from loans. The way they differentiate their earnings is exposure to types of loans, geography, and client base. While Royal Bank of Canada has an edge in personal banking, Bank of Montreal (TSX: BMO) has an edge in commercial loans.
They both are growing their asset base through acquisitions. RBC acquired HSBC’s Canadian operations last year and achieved annualized cost synergies that drove its diluted adjusted earnings per share (EPS) up 18%. BMO acquired San Francisco’s Bank of the West in 2023 but suffered from stagnant commercial loan growth and high PCL. It has been offloading non-core, lower-return loan portfolios to strengthen its balance sheet and improve return on equity.
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Why did Bank of Montreal stock surge 10% last month?
After an entire year of high PCL and slow commercial loans, BMO reduced PCL in its third-quarter earnings and beat analysts’ estimates. This drove the stock up 10% last month, with most of the rally coming on August 26, the date of the earnings release.
BMO’s net income surged 25% year-over-year to $2.3 billion, and EPS surged 26% to $3.14. The increase in US personal lending and rising deposits in wealth management and capital markets was partially offset by lower US commercial loans and moderating Canadian commercial loans and residential mortgages.
The weakness in commercial loans can be attributed to businesses postponing their capital spending amidst tariff uncertainty. However, a recovery is expected in this segment as tariff concerns ease and trade rebounds, either through supply chain shifts or trade negotiations.
What factor affects Bank of Montreal’s stock price
The dip in PCL shows that asset quality is improving. In a bank stock, long-term investors see asset quality and short-term speculators interest income.
The central bank’s interest rate decisions affect a bank’s key source of income, interest from loans. But its asset quality is determined by borrowers’ financial stability. The value of this loan portfolio drives a bank’s share price.
Bank of Montreal’s stock price has surged 40% since April 8, outperforming RBC, which rose 29%. One major reason for the difference in stock performance was BMO’s higher mix of commercial loans. The April announcement of retaliatory tariffs on all US trading partners removed the cost disadvantage for Canada.
BMO is looking to acquire Canadian wealth manager Burgundy Asset Management to focus on high-net-worth and ultrahigh-net-worth individuals, families, and institutions. It could help the bank grow its asset base in the wealth segment and earn higher fees.
Should you buy the bank stock now?
The recent rally from the earnings release has pushed the stock into the overbought category, with a Relative Strength Index (RSI) of 78. The RSI looks at the 14-day stock price momentum and determines whether the stock is overbought at an RSI of over 70.
BMO stock is driven by economic growth, and the tariff uncertainty has slowed this growth. The stock could fall if inflation rises, consumer spending slows, or the risk of recession materializes. While these risks eased in August, they cannot be ruled out until tariff tensions ease. It means that you should invest in economically influenced stocks with caution.
Buying the stock near its all-time high is something I may not recommend. A sharp correction could occur with the next shock from Trump. You could instead wait for the stock to correct 5–6% before investing in it.
However, if you are investing in the Bank of Montreal for dividends, even now is a good time.
