Bank Of Montreal: A Top Canadian Dividend Play

| About: Bank of (BMO)

Summary

BMO has the second highest Leverage ratio of the five biggest Canadian banks..

Its US Retail and Commercial Banking division's results, however, came in below expectations..

BMO's uninsured mortgage exposure to the provinces of Ontario and British Columbia relative to total regulatory capital is the lowest of the biggest Canadian banks.

Bank of Montreal's (NYSE:BMO) share price showed reasonable declines since I first wrote about the bank in early March after somewhat disappointing second quarter results and rising fears over the Canadian mortgage market. The bank, however, remains one of the best Canadian banks with reasonable growth prospects and a strong capital position.

Readers should note that all figures are referenced in Canadian dollars unless the contrary is indicated. It should also be noted that all capital figures referenced are on a Basel III basis and where applicable on an All-In basis.

Asset Quality and Capital

BMO has a Capital Adequacy Ratio of 14.9% which is the third highest of the five major Canadian banks. It is also well above the regulatory minimum of 11.5% set for the six biggest Canadian banks.

(Source: Company Fillings)

The banks Common Equity Tier1 (CET1) CAR at 11.3% is also the third highest of the major Canadian banks and well above the regulatory minimum 9.5%. This was further an improvement from its 11.1% CET1 CAR reported in the first quarter of 2017.

(Source: Company Fillings)

Its leverage ratio at 4.3%, along with that of Royal Bank of Canada (NYSE:RY), is also the second highest of the major Canadian banks. It may again be worth emphasizing that the leverage ratio referred to in this article is the Basel III leverage ratio which is total Tier1 capital over total exposure.

(Source: Company Fillings)

Concerns over a possible housing bubble in Toronto and Vancouver again warrants a closer look at the banks' exposure to mortgages in these areas. BMOs uninsured mortgage exposure to the provinces of Ontario and British Columbia, in which Toronto and Vancouver is located, at 0.82 times total regulatory capital is the lowest of the five biggest Canadian banks.

(Source: Company Fillings)

It is also the only one of the five biggest Canadian banks whose exposure to uninsured mortgages in these provinces relative to total regulatory capital is at less than 1. Readers should take note thereof that the mortgage exposure to total regulatory capital is not a measure which the banks report and that the chart above therefore reflects the authors calculations based on the financial statements.

Its weighted average Loan to Valuation (LTV) ratio on uninsured Canadian mortgages is, however, the second highest of the five biggest Canadian banks. This is not, however, particularly concerning as an average LTV ratio of 54% is still conservative by international standards. Its 90-day delinquency ratio at 0.23% on Canadian mortgages also remains very low and reflects the quality of the banks' lending book.

(Source: Company Fillings)

It can therefore be said that BMOs strong capital position and relatively low exposure to Canadian mortgages in the problem areas to total regulatory capital places it in a strong position to deal with any potential headwinds in the Canadian mortgage market.

Earnings and Dividend

BMO has the longest dividend history of the major Canadian banks and has paid a dividend every year for more than 180 years. The stock is expected to yield 3.83% in 2017 which is below its 5-year average forward dividend yield of more than 4%.

(Source: Reuters)

Its expected payout ratio for 2017 at 45.4% is also, along with that of Toronto-Dominion Bank (NYSE:TD), the lowest of the five biggest Canadian banks. It was, however, revised upwards from around 44.9% in light of the second quarter results.

(Source: Reuters)

The US Personal and Commercial Banking division is the area in which the most disappointing results were reported with a 7% YoY decline in adjusted and reported net income. This decline was, however, largely the result of a more than 70% YoY increase in provisions for credit losses at this division.

The bank continued to perform well at group level with a 12% YoY increase in adjusted Net Income and an 11% YoY increase in EPS. Wherefore the disappointing results at its US Personal and Commercial Banking division does not give rise to substantial concerns.

Its adjusted Return on Equity (ROE) at 13.1% was also well-above the 12.1% reported in the second quarter of 2016. The bank also remains cost conscious with a 5% YoY increase in adjusted expenses and a 1% decline in reported expenses. Take note thereof that the adjusted figure disregards certain restructuring costs from 2016 to present more 'normalized' figures for comparative purposes.

Valuation and Conclusion

BMO is trading at a forward P/E ratio of 11.9 which is not substantially higher than its 5-year average forward P/E ratio of around 11.3. It is also the second lowest forward PE ratio of the five biggest Canadian banks.

(Source: Reuters)

BMOs 2017E price to book value at 1.45 is also the lowest of the five biggest Canadian banks and close to its 5-year average forward price to book value of around 1.4. When comparing its expected ROE for 2017 to its forward price to book value relative to that of its peers it also becomes apparent that BMO is trading at a discount to its peers.

(Source: Reuters)

It can therefore be said that BMOs lower-than-peers exposure to the Canadian mortgage market and valuation levels along with a good dividend history makes it an attractive long term dividend growth stock.

If you enjoyed this article please consider following me by clicking the follow button next to my name. Take note thereof that all charts were created by the author. The source indicated at the bottom of the charts is therefore the source of the underlying data.

Disclosure: I am/we are long BMO, CM, TD.

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.

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