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Is Bank Of Montreal A Buy Or A Hold?

Ploutos Investing profile picture
Ploutos Investing


  • Bank of Montreal is the fourth-largest bank in Canada.
  • The bank has a strong capital position and an improving PCL.
  • BMO has a relatively lower exposure to the Canadian housing market than its industry peers.
  • Its presence in the Canadian ETF market should provide a long runway of growth for its wealth management business.

Investment Thesis

Bank of Montreal (NYSE:BMO) (TSX:BMO) is the fourth-largest bank in Canada. The bank has a strong capital position and an improving PCL. Compare to its Canadian peers, BMO has a relatively lower exposure to the Canadian housing market. Its presence in the Canadian ETF market should provide a long runway of growth for its wealth management business. However, its shares are currently fairly valued based on comparative PE analysis. Investors may want to patiently wait for a better entry point.

Source: YCharts.com

Reasons Why Bank of Montreal is a Buy

Strong Capital Position

BMO's strong capital position is evident in its Common Equity Tier 1 (“CET1”) ratio. For readers who are not familiar with the term, CET1 is a measure of a bank’s capital against its assets. BMO’s CET1 ratio in Q1 2018 was 11.1%. Despite a 30 basis points decline, we note that its internal capital generation was strong at 28 basis points. The decline was mostly due to DTA charge, share buybacks, and higher source currency RWA. BMO’s CET1 is slightly better than Royal Bank's (RY) 11%, CIBC's (CM) 10.8%, and TD Bank's (TD) 10.6%.

Source: Q1 2018 Investor Presentation

Improving PCL

BMO’s Provision For Credit Losses (“PCL”) improved considerably in Q1 2018. In fact, its PCL on impaired loans reduced to C$174 million. This is the third consecutive improvement quarter over quarter. While its PCL on impaired loan increased by C$7 million year over year, its total PCL decreased to C$141 million in Q1 2018, from C$167 million in Q1 2017.

Source: Q1 2018 Investor Presentation

An Excellent track record of dividend payout history.

BMO has an excellent track record of dividend payout history. In fact, the bank has paid dividends to its shareholders for more than 189 years. This is the longest running dividend payout record of

This article was written by

Ploutos Investing profile picture
I am a value focused investor. Stocks rise and fall for many different reasons that we often cannot predict. Eventually, it is those companies with a wide moat and the ability to generate cash flow that prevail. Therefore, my investment focus is to find value stocks that are able to generate cash flow, with sustainable dividends and provide growth over time. I focus my attention on analyzing large-capped dividend growth stocks, REITs and ETFs. I aim at providing a quarterly update and insights on stocks I follow. Please feel free to browse the articles that I wrote and provide any comments.

Analyst’s Disclosure: I am/we are long TD, CM. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (10)

Barrie Abalard profile picture
I'm happy with my Canadian banks. Would like to own more but already have a good percentage of the portfolio in RY, BMO, and CM. Will not own a US bank--low returns and risk profiles are not to my liking.
Sound Investment profile picture
It really doesn't matter which Canadian bank you buy; they are all amazing. It's impossible to predict which will perform better. I like TD and RY because of their international exposure. But really, with these incredible dividends, and the inflow of money into Canada, you can't miss with any Canadian banks. I also own several BMO ETFs. My favourite is ZDY.TO. Their ETFs are some of the best on TSX with low management fees.
Thanks for the table showing valuation. My current ranking/holdings for the big fives are: CM, BNS, BMO, RY, TD which coincides with their dividend yield and also agrees to the potential increase from 19 EPS ratio to 5-yr PE ratio in the table. These are all great banks for long term hold with some trading.
Blue Vinyl Radio profile picture
Is Bank Of Montreal A Buy Or A Hold? - BUY
Thanks for the article Ploutos. BMO's dividend record is amazing. Forget about diversification - you could be 100% BMO!
Canadian ETFs? LOL. What a dead marketplace, doubt there's more than just a handful of Canadian ETFs that even make any money for their sponsors.
BMO is a major Canadian player in ETFs.

For the month of January, Canadian ETF industry assets under management stood at $150.2 billion, an increase of $2.9 billion, or 2.0%, over the previous month. The increase was driven by market movement of $0.8 billion and inflows of $2.1 billion. The top three inflows categories were U.S. Equity, International Equity and Canadian Fixed Income. BMO ETFs reported inflows of more than $973 million, led by ZAG, ZSP and ZBK. AUM stood at $47.9 billion, an increase of $1.2 billion, or 2.5%, for a total market share of 31.9%.

Even at 10 bps, this represents $50MM of revenue. Not too shabby. Besides, along with the ETFs they can offer a myriad of banking, trust and other high margin services.
$50mm of revenue minus expenses, rebates, etc. Probably doesn't add up to much $$. Assets are of course concentrated in the least expensive products. And they're probably just cannibalizing their active fund business which has far more impressive management fees.
richjoy403 profile picture
IMO, this discussion is missing the mark, and cannot reach a USEFUL conclusion without consideration of the growth rate of BMO's ETF AUM.

Keeping in mind it is the client's money that is at risk, and once established operation of ETFs is a low cost operation, I believe BMO may have an excellent ETF business IF AUM is growing at an appropriate annual rate.

Long: BMO & TD

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