BANK OF MONTREAL $70 (Toronto symbol BMO; Conservative Growth and Income Portfolios, Finance sector; Shares outstanding: 644.5 million; Market cap: $45.1 billion; Price-to-sales ratio: 2.2; Dividend yield: 4.2%; TSINetwork Rating: Above Average; www.bmo.com) is Canada’s fourth-largest bank, with $537.3 billion of assets.
The bank is buying U.K.-based F&C Asset Management, which sells investment services to individuals and institutional clients, such as pension plans and insurance companies.
F&C has $136 billion U.S. in assets under management, which will increase the assets that Bank of Montreal’s Global Asset Management division administers to $269 billion U.S. The purchase will also add many wealth management clients outside North America.
Bank of Montreal will pay $1.3 billion for F&C, assuming it does not attract a better offer (F&C’s shares trade on the London Stock Exchange). The bank aims to close the deal by May 1, 2014.
To put this purchase in context, Bank of Montreal earned $4.3 billion, or $6.30 a share, in fiscal 2013. That’s up 4.8% from $4.0 billion, or $6.00 a share, in 2012.
Low interest rates are cutting the income the bank receives from its loans. However, it set aside $589 million to cover potential bad loans in fiscal 2013, down 23.0% from $765 million in 2012. That was the main reason for the higher earnings.
Revenue rose just 0.8%, to $16.3 billion from $16.1 billion. Revenue from Canadian retail banking (39% of the total) gained 2.1%, as low interest rates continued to spur mortgage and business loan demand. However, U.S. banking revenue (18%) fell 2.9% due to lower interest income, which offset stronger loan demand from businesses.
Wealth management revenue (22%) jumped 18.9%, because improving stock markets raised the value of the assets this business manages. Higher trading volumes also pushed up revenue at the bank’s trading division (21%) by 4.6%.
Bank of Montreal continues to cut costs, which will help lift its fiscal 2014 earnings to $6.35 a share. The stock trades at 11.0 times that forecast.
As well, the bank recently raised its quarterly dividend by 2.7%, to $0.76 a share from $0.74. The new annual rate of $3.04 yields 4.2%.
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