Bank Of Montreal: Solid Beat On US P&C And Capital Markets

| About: Bank of (BMO)

Summary

BMO reported a solid Q1, driven by strong P&C and Capital Markets.

Wealth management missed, but the unit appears to be underappreciated by many.

Like the story but valuation remains rich. Staying on the sidelines until sustained P&C growth.

BMO (NYSE:BMO) reported a strong beat in its Q1 earnings with an adjusted EPS of $1.75, +14% y/y, vs consensus $1.72, driven by solid P&C and Capital Markets results. Interestingly, Canadian banking growth of +5% was ahead of most analysts' expectations, given the weak Canadian economy, while wealth management declined by 1%. Oil & gas PCLs accounted for 1.19% of the loans and that reduced EPS by roughly 2 cents. In terms of O&G, impaired was 2.2% of the O&G loans and a +$60m higher than the prior quarter, but should be manageable in my view. The bottom line is that the US P&C and the US Capital Markets business are quite solid and may be underappreciated by most of the investors as they continue to focus more on BMO's predominant Canadian exposure. I think there could be a lot of upside for this franchise if they execute, but given the current valuation of 10% premium vs the peer average, I do not think that I am ready to be a buyer yet. My preferred picks among the Canadian banks are Royal Bank of Canada (NYSE:RY) and TD (NYSE:TD).

P&C banking looks decent at home and abroad. Canadian banking earnings growth of +5% was driven by a +6% increase in revenue while operating leverage added another 1.5%. Loan growth was solid at +5% with residential growing at +5%, while business grew +9%. NIM was stable at 2.55%. US P&C grew +11% in USD or +29% in CAD, driven by a +15% revenue growth. Loan growth of +10% included a +9% commercial loan growth ex-GE. Indirect auto loans declined 7% as BMO tries to scale back on this segment. NIM was 3.63% which is reflective of BMO's acquisition of GE Capital's Transportation Finance asset as well as the positive impact from the Fed Fund rate hike.

Capital market was once again the star this quarter, despite investors applying a discount to this segment. Earnings growth of +18% was driven by trading as well as ECM and advisory. Total trading revenue of $423m was up from $344m in the last quarter, mainly driven by strong results from rates trading ($132m vs. $111m last quarter). ECM and advisory revenue of $166m was $20m more than the prior quarter, which I think is quite impressive given the weak capital market environment in Canada.

Finally, wealth management declined by 1% and was driven by the weak markets. In my view, BMO's wealth management business is highly underappreciated by the investment community in that it could potentially disrupt the Canadian banking industry after its roll out of robo advisor. The simplicity and attractive fees of the structure could allow BMO to take market share in wealth from the competing banks. At the same time, BMO can upsell to the high-end clients who will account for majority of the fees. My view is that the bank that can quickly adapt to the changing landscape in fintech will ultimately prevail and it appears that BMO is on the right path.

Conclusion, story is looking quite attractive but valuation is rich. I am staying on the sidelines until I see more evidence of a sustained P&C growth.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.