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In spite of significant risk and potential economic headwinds, the Bank of Montreal (NYSE:BMO) has increased its revenue by 15.7% and increased its profitability by 34% over Q1 last year. The acquisition of Milwaukee-based lender Marshall & Ilsley has been a key contributing factor in the bank's success in Q1 for 2012.

For the three-month period ending on January 31, BMO Bank reported revenue growth of 15.7% compared with a year ago. The Bank of Montreal reported a revenue of $4.12 billion in Q1 compared with $3.47 billion last year. Two of the main factors for the increase in revenue are: the company's focus on customer satisfaction and the recent acquisition of Wisconsin lender Marshall & Ilsley Corp.

According to Proactive investors: BMO President and chief executive officer, Bill Downe, states "BMO produced record results for the quarter. Our focus on customers and investing wisely in the business are serving us well, and this is reflected in our results and the momentum of the bank."

The acquisition of Marshall & Ilsley has helped boost BMO's exposure to the American market. Even though the American market exposure has added risk, that risk has paid off as BMO's profits jumped 34% this quarter. BMO reported profits increasing from $825 million, or $1.34 per share in Q1 last year to $1.1 billion, or $1.63 per share in Q1 this year.

In the first-quarter 2012 report to shareholders the bank states:"In the current quarter, the acquired business contributed $269 million to reported net income and $215 million to adjusted net income, up from $199 million and $149 million, respectively, in the fourth quarter of 2011."

The Bank of Montreal sees many challenges going forward. The significant uncertainty remaining in the market, particularly as it relates to Europe, is a key concern for the bank and investors alike. The bank addressed it's exposure to the European markets in the Q1 Conference call (PDF Under Transcripts) by stating:

Our net direct exposure to the five high risk countries of Greece, Ireland, Italy, Portugal and Spain is quite modest at just under (sic) $200 million including unfunded commitments of $48 million. It primarily consists of exposures to bank for trade finance and trading products. Net direct exposure to the remaining Eurozone countries is $4.7 billion and for the rest of Europe, another $3.6 billion.

Along with significant upside, the bank's acquisition of Marshall & Ilsley also incurred a large amount of risk. In the caution regarding forward-looking statements the Bank of Montreal addressed this risk by stating:

the possibility that the anticipated benefits from the transaction, such as expanding our North American presence, providing synergies, being accretive to earnings and resulting in other impacts on earnings, are not realized in the time frame anticipated, or at all, as a result of changes in general economic and market conditions, interest and exchange rates, monetary policy, laws and regulations (including changes to capital requirements) and their enforcement, and the degree of competition in the geographic and business areas in which the combined business now operates; our ability to effectively integrate the businesses of M&I and BMO on a timely basis; reputational risks and the reaction of M&I's customers to the transaction; diversion of management time to issues related to integration and restructuring; and increased exposure to exchange rate fluctuations.

Another area of risk going forward for the bank is: Canadian household debt levels and the housing market. The bank is monitoring and paying close attention to potential rate increases coming in the mid term. Even though there is no anticipated increase in 2012, the bank is expecting an increase in 2013. In a statement to the (The Canadian Free Press) the bank states "it does not expect interest rates to rise again until the early part of 2013."

Surjit S. Rajpal, BMO's Chief Risk Officer and Executive Vice-President addresses the issue of risk at the Q1 Conference call (PDF Under Transcripts) by stating "we believe the risks in our consumer book are manageable. Our prudent underwriting standards have been maintained through the cycle, and we continue to outperform peers on loss ratios across every consumer product portfolio."

Even with significant risk and potential economic headwinds particularly in Europe, the Bank of Montreal believes that the risks are "manageable." The bank's acquisition of M&I has been a key contributing factor in the current success for the bank, with BMO posting revenue that increased by 15.7% over last year and profitability that increased by 34%.

  1. Estimated Sales = $15.63 Billion
  2. Estimated Profit Margin = 26.7%
  3. Profit = $4.17 Billion
  4. Shares Outstanding = 640.38 Million
  5. EPS = $6.51
  6. Forward P/E = 9.66

BMO - Bank of Montreal Stock Price Target for 2012 = $62.98 USD

ActionAnalystRatingPriceDate
TargetRBC Capital MarketsSector Perform$66.00 « $69.0003/01/12
MaintainScotia CapitalSector Underperform$66.0003/01/12
TargetCIBC World Markets $62.00 « $63.0002/29/12
MaintainCIBC World MarketsSector Underperform 02/29/12
MaintainS&P ResearchBuy$65.0002/29/12
DowngradeMacquarie ResearchNeutral « Outperform 02/29/12
UpgradeCredit SuisseOutperform « Neutral 02/23/12
TargetCanaccord Genuity $65.00 « $67.0002/16/12
TargetBarclays CapitalEqual Weight 02/13/12

Source: Bank Of Montreal: Well Positioned For Future Profits