Bank of Montreal (BMO): It’s time to “buy” more
I have written a few times about the Bank of Montreal (New York Stock Exchange: BMO), one of the big interesting Canadian banks. It is a bank that offers good performance, good security and excellent overall returns.
We do We want to look at the valuation before we invest, to make sure we’re not paying too much for the bank, but the usual valuation and price range that this bank moves between is quite narrow. This makes it, at least theoretically, somewhat predictable as an investment.
Let’s see what BMO can offer us in terms of benefits and returns.
Bank of Montreal – Review of the company and its results
Ending well in 2021, the company has since released the initial period of 2022. This period has been at attractive levels, with good revenue, EPS, efficiency, RoE and fundamentals, including maintaining a ratio CET1 of 14% and more.
BMO announced the merger and acquisition of Bank of the West, and each banking segment performed well, despite general market conditions and macro geopolitics.
BMO has strong US operations – stronger than some US banks, with operations in the Midwest, West Coast, Texas, Florida and others. These segments have shown very promising results, and the bank is now No. 11 in commercial lending with a No. 3 deposit market share in major footprints, such as Chicago and Milwaukee. Growth is also strong here, and more than 50% of the company’s revenue comes from areas that are not part of the company’s overall business footprint.
The merger and acquisition will accelerate NA’s growth, and the bank has already filed for regulatory approval, with expectations of $670 million in cost synergies on a pretax basis.
The fundamentals of the business remain extremely solid. A 200+ year history beginning in 1817, and NA’s 8th largest bank by assets, serving 12 million customers on an annual basis means it is one of Canada’s largest banks. most important in which to invest. My stance on banks – BMO, Scotiabank (BNS) and CIBC (CM) and others are positive. I own shares in each of them, and I buy more when the valuation allows.
Overall, very few positives have changed for Bank of Montreal. The BoTW merger and acquisition adds FV impact to the company’s balance sheet, but calculating these can be somewhat tricky given their relative sensitivity to global interest rates. This will also have an impact on the amount of goodwill, and therefore on the share capital. Higher interest rates mean higher goodwill due to the lower fair value of fixed rate assets, which will increase BMO’s capital needs. I think it’s fair to say that we’re not going into a low rate environment, which means the FV for the bank will be around $12 billion, which implies a capital raise of 2, $7 billion from BMO.
Still, customer deposits are showing encouraging increases, with customers increasing their pace as rates rise, up nearly $40 billion a year. The company’s NIM and NII will obviously also increase due to rising interest rates, with a 1% rate increase implying a $540 million pre-tax increase in income.
Bad loans have returned to levels close to pre-pandemic levels.
And the overall loan portfolio looks very good, with 45% consumer loans split between mortgages, cards and personal loans, and 55% government/corporate loans, with only very marginal exposures (1%) to oil and gas. The highest exposures here are financial services, service industries, real estate, manufacturing, and other relatively conservative sectors.
Are there any significant risks for BMO here?
Not really. The main questions focus on the impacts and positive effects of rising rates, and how these changes affect capital markets. There are also some questions about how quickly or effectively the company supports its technology projects – with the bank responding that investment in technology and sales force will continue.
Supply chain issues also translate into loan growth/loan portfolio issues. Despite these issues, BMO is seeing significant loan growth, with much of the loan growth in the United States actually coming from new business.
However, at a high level, it would be incorrect to characterize BMO as a bank facing serious risks or pressures. It’s simply a bank in the current environment, which comes with its own set of headwinds and risks – but none really specific to BMO.
I continue to believe in the business as a valuation case – and that makes BMO’s valuation crucial. Here are the company’s current trends in valuations.
We are entering an environment where quality valuations will (finally) fall. This gives us prime buying opportunities, both during and after a potential crash.
BMO is certainly attractive here. The company typically trades at average valuations between 9.5 and 11X P/E, with a current P/E of 10X. Based on the exact 5-year average of 10.84X, this implies a slight upside to 2022E and a more significant upside to 2024E, based on significant EPS growth expected on the back of volume growth. increased activity and positive rate trends.
As you can see, the upside is significantly higher at only 7-9% per year at this point. It is an A+ rated bank with a yield of 3%+. It’s one of the weakest performers in Canadian banking, but it’s also one of the safest banks in terms of portfolio diversification, exposure to the US market and expected earnings growth over the course of the year. coming years, as well as the historical accuracy of these growth figures. .
These may not be the most interesting companies to invest in. I admit it. 10-16% per year, you might be wondering – that’s not that much, is it?
Well, compared to some things, it probably isn’t, no. But entering an inflationary hell, some would say a stagflationary environment, your portfolio needs sure bets.
The Bank of Montreal is a safe bet.
BMO is not going anywhere. This is a secure, hedged return, backed by a core banking oligopoly in one of the safest countries in the world.
For the US-listed BMO ticker, analysts expect a range between $145 and $175 per share, averaging $160/share, implying about a 50% upside here. I would view this much more conservatively at around $140/share longer term. However, even for this more conservative price target, the upside is well over 20%, if not over 30%.
In my opinion, BMO will behave as expected, which will ensure that your portfolio will behave at least in line with market expectations, with growth of 10-16% per year. It also has the ability to outperform further, reaching 20-22% per year, if things reach all-time highs.
But it doesn’t usually go much beyond that – not historically.
So BMO is a safe bet. This is the kind of safe bet we currently need and want. Because as I watch the market go up and down, it’s a pretty scary market we’re in right now.
I consider BMO a “BUY” with a price of $140/share for the NYSE-listed BMO ticker based on a 2024E forecast.
My thesis for BMO is as follows:
- The bank is a large company/organization with fundamental securities that have performed extremely well during the pandemic and has incredible tailwinds to recovery, which are playing out now and will likely continue to do so.
- BMO investors can count on long-term security for their invested capital, coupled with fair returns with a yield of around 3.2% today.
- The upside, including capital appreciation, is now over 15% on a conservative basis. I consider this company a “BUY” with a PT of $140/share.
The bank also fulfills each of my investment criteria.
- This company is overall qualitative.
- This company is fundamentally safe/conservative and well run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic advantage based on earnings growth or multiple expansion/reversion.
Based on these trends, current earnings and projected EPS growth of 55% in 2022, I consider BMO a “BUY” with at least 10-18% upside this year, potentially more over a period 3 years old.
Thanks for the reading.