This Canadian bank now generate a significant portion of its earnings in the U.S.
Profits from its U.S. operations jumped in the most recent quarter. Canadian operations have also been strengthened with investments in the online and mobile banking platforms. The longest continuous dividend-paying stock in Canada, the bank recently raised its dividend again; it yields 3.7%.
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BANK OF MONTREAL (Toronto symbol BMO; www.bmo.com) is Canada’s fourth-largest bank, with assets of $727.9 billion (as of January 31, 2018).
Canadian retail banking operations supply 42% of the bank’s earnings, while the U.S. branches contribute 20%. Bank of Montreal gets another 20% of its earnings from its capital markets operations, which sell brokerage and securities-trading services. The remaining 18% of earnings comes from wealth management services.
The bank earned $1.46 billion in its fiscal 2018 second quarter ended April 30, 2018. That’s up 13.0% from $1.30 billion a year earlier. Due to fewer shares outstanding, earnings per share rose at a faster rate of 14.6%, to $2.20 from $1.92.
The latest results exclude unusual items. Among them is a $192 million (after-tax) charge related to Bank of Montreal investments in its online and mobile banking platforms as well as other elements of its restructuring plan. On that basis, the latest earnings beat the consensus estimate of $2.12 a share.
Earnings from Canadian retail banking (40% of the total) rose 11.5% due to higher interest rates and loan balances. U.S. retail banking (19%) saw its profits jump 48.9%, partly because recent U.S. tax reforms added $25 million to the unit’s profits of $280 million.
Recent changes to the U.S. tax code cut the corporate income tax rate from 35% to 21%. That hurt the value of Bank of Montreal’s deferred tax credits in the first quarter, when it had to write down that asset by $425 million (Canadian). However, the lower tax rate has already begun to spur earnings going forward.
Earnings for its wealth management business (21%) gained 11.6%, as improving stock markets increased the value of its assets under management. However, earnings at the bank’s capital markets operations (20%) fell 8.3% on lower trading volumes and underwriting activity.
In the quarter, the bank’s overall revenue declined 2.2%, to $5.62 billion from $5.74 billion a year earlier. That’s mainly due to lower revenue from its capital markets business. Loan-loss provisions dropped 36.3%, to $160 million from $251 million, thanks to lower provisions at its U.S. operations.
Blue Chip Stocks: Expanded alliance opens up more opportunities in China
In May 2018 Bank of Montreal agreed to buy KGS-Alpha Capital Markets. Based in New York City, this privately held firm provides brokerage services to institutional investors such as pension plans. It specializes in mortgage and asset-backed securities.
The bank has yet to reveal how much it will pay for that business. However, the new operations complement its existing brokerage operations in the U.S. The purchase will also give the bank access to KGS-Alpha’s high-quality clientele.
Earlier in year, the bank expanded its alliance with Industrial and Commercial Bank of China Ltd. (ICBC). This new deal will make it easier for Bank of Montreal to sell its mutual funds and exchange-traded funds (ETFs) through ICBC’s branches. The bank also currently owns 28% of Chinese mutual fund company Fullgoal Fund Management Co., but has yet to sell its own funds through this business.
The expanded deal with ICBC gives Bank of Montreal more opportunities to increase its corporate lending and foreign-exchange services in China.
Bank of Montreal has paid dividends without interruption for 189 years. It will raise its quarterly dividend by 3.2%, starting with the August 2018 payment. Investors will receive $0.96 a share, instead of $0.93, for a new annual rate of $3.84. That yields 3.8%.
The bank will probably earn $8.70 a share in 2018. The stock trades at just 11.7 times that estimate.
Recommendation in The Successful Investor: The Bank of Montreal is a buy.
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OK. I like the format. More easily used because of the category delineation