Is Bank of Montreal Falling Behind ScotiaBank and TD Bank?

Bank of Montreal (BMO 0.60%) will release its quarterly report on Tuesday, and investors have pushed the stock to all-time highs recently in light of the continued health of the Canadian banking system. But unlike TD Bank (TD 0.87%), Bank of Nova Scotia (BNS 0.17%), and some of its other Canadian peers, Bank of Montreal is expected to see earnings drop slightly from year-ago levels. What's behind the disparity, and should investors be worried?

For bank investors in the U.S., Bank of Montreal and its fellow Canadian banks seem like a blast from the past, with huge dividend yields that reflect the fact that they largely sidestepped the damage the 2008 global financial crisis wrought on their U.S. peers. Yet Canada isn't without economic challenges of its own, and with gold and other natural resources having seen their prices stay stubbornly low lately, some of the momentum that the Canadian economy had has disappeared. Can Bank of Montreal make a smooth transition to potentially more difficult conditions?

Let's take an early look at what's been happening with Bank of Montreal over the past quarter and what we're likely to see in its report.

Stats on Bank of Montreal

Source: Yahoo! Finance.

What's next for Bank of Montreal?
In recent months, analysts have had mixed views on Bank of Montreal's earnings prospects. They've boosted their October-quarter views by $0.04 per share, but they've clipped a penny per share from their fiscal 2014 projections. The stock has marched steadily higher, rising 12% since late August.

Bank of Montreal came into the quarter on a high note, with July-quarter results that showed substantial growth. Adjusted net income jumped 12% as the bank was able to set aside much smaller amounts to cover credit losses and a 4% jump in total revenue. The bank's private client group was particularly strong, with earnings doubling from year-ago levels, and retail markets both in Canada and in its U.S. operations helping Bank of Montreal's overall growth stay on an upward track.

Arguably, the biggest success for Bank of Montreal has been to tap the lucrative U.S. financial market at just about exactly the right time. With its $4 billion purchase of Milwaukee's Marshall & Ilsley, the company doubled the amount of deposits and branch locations it had south of the border. Bank of Montreal has also bought other banking and insurance assets, and that diversification -- which TD Bank has emulated to some degree -- could prove to be valuable if things start to get worse in the Canadian banking market.

Bank of Montreal has other strengths as well. Its common equity ratio under the Basel 3 standards is the highest of its major banking peers, exceeding TD Bank and Bank of Nova Scotia as well as five other top Canadian banks. That has given Bank of Montreal the ability to pay a 4% dividend while also making substantial stock buybacks in the recent past. Moreover, it has traded at a relatively low price-to-tangible book value ratio compared to its rivals.

Some have noted that weakness in the Canadian economic growth story could reverse some of Bank of Montreal's gains. Yet those concerns didn't materialize in the bank's previous quarter, and overall, the banking industry has done a solid job of shoring up its internal efficiency in controlling costs and maximizing profits even as conditions become less attractive.

In the Bank of Montreal earnings report, look for any signs of deterioration in the bank's Canadian segment. With Canada having done so well for so long, any loss of momentum from Bank of Montreal's domestic business could lead to a reversal of the gains the stock has posted lately. Moreover, if projections for Bank of Montreal to underperform TD Bank and ScotiaBank on the revenue front come to pass, make sure to identify which segments are holding Bank of Montreal back, and look for commentary on how the bank plans to remedy those headwinds going forward.

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