Canadian banks have dodged the financial crisis in a way that eluded their U.S. counterparts. They chose to be conservative and refrained from the reckless sub-prime lending and investing in risky mortgage-backed securities. No wonder Canadian banks have been posting impressive earnings results and making their presence felt internationally. Among them, I find Bank of Montreal (NYSE: BMO ) to be particularly interesting.
The bank has been manufacturing some significant operational improvements since the recession hit, such as declining provisions for credit losses. It has also seen gradual strength in its capital base lately.
In its latest quarter, BMO reported net income of $830 million. Provisions for bad loans fell once again, and its return on equity is strong. The bank saw an improvement in net interest margin, too, owing to better loan and deposit spreads. BMO is focusing on core operations and preparing to surpass its rivals.
The growth plan
BMO, like other Canadian banks, has been focusing on strengthening its U.S. business. Its recent acquisition of Marshall & Ilsley Corp. should help the bank expand its presence in the U.S. by adding M&I’s asset management and institutional trust business.
What makes BMO stand out?
The table below should give you a clear idea why I like BMO more than its peers: it’s cheaper.
Tier 1 Capital Ratio
|Bank of Montreal||11.9||1.31||11.5%||4.7%|
|Royal Bank Of Canada (NYSE: RY )||13.3||2.06||13.6%||4.2%|
|Toronto-Dominion Bank (NYSE: TD )||13.5||1.75||12.7%||3.5%|
|The Bank of Nova Scotia (NYSE: BNS )||11.8||2.14||12.0%||4.0%|
Source: Capital IQ, a Standard & Poor's company.
BMO has the most compelling figures in the table. Though its Tier 1 capital ratio declined last quarter (reflecting the M&I acquisition), it remains above required levels.
Furthermore, the bank offers a higher dividend yield than its competitors and appears to be more attractively priced at the moment. And the fact that it has the lowest P/E (except for BNS) and P/B ratios shows that the market hasn’t factored in the advantages yet.
The Foolish bottom line
As I see it, with such strong fundamentals and smart acquisitions, BMO reveals strong potential for growth. On the whole, it looks like a pretty cheap stock set to rule the roost.