BANK OF MONTREAL $68 (Toronto symbol BMO; Conservative Growth Portfolio, Finance sector; SI Rating: Above average) is Canada’s fourth-largest bank, with assets of $320.0 billion.

Outside of Canada, its biggest operation is Harris Bank, which operates 200 branches in Chicago. The United States accounts for roughly 15% of Bank of Montreal’s income.

Harris aims to expand its operations in the U.S. Midwest to between 350 and 400 branches, which will give it the scale it needs to compete with bigger U.S. lenders. As part of this strategy, it recently acquired First National Bank & Trust for $325 million. That will add 32 branches in Indiana, and $1.3 billion U.S. in assets.

To put the price in context, Bank of Montreal earned $1.35 a share (total $696 million) in the three months ended October 31, 2006. That’s a 5.5% improvement over its year-earlier profit of $1.28 a share ($664 million). Most of the gain came from declining loan loss provisions, as the improving economy has helped the bank recover some loans it had already written off.

Revenue fell 5.7%, to $2.5 billion from $2.65 billion. However, the year-earlier figure includes revenue from its now discontinued U.S. discount brokerage operation, as well as gains on the sale of assets. Without these items, revenue fell just 0.8%, as lower revenue from its stock trading operations offset higher revenues at its retail banking business.

The lower revenues hurt Bank of Montreal’s efficiency ratio, which increased to 64.6% from 61.4% a year earlier.

The bank is also renovating most of its retail branches, including replacing nearly all of its ATMs and overhauling its computer networks, which increased its non-interest costs.

But these investments should help Bank of Montreal cut this figure by at least 1.0% in fiscal 2007. Better computers should also prompt more customers to switch to online banking, which would cut its operating costs.

The bank now aims to pay dividends of between 45% and 55% of earnings, up from its old target of 35% to 45%. The current rate of $2.60 yields 3.8%. The stock now trades at just 12.7 times its forecast 2007 profit of $5.36 a share.

Bank of Montreal is a buy.