Key Morningstar Metrics for Bank of Montreal
- : C$175.00Fair Value Estimate
- : ★★Morningstar Rating
- : NarrowMorningstar Economic Moat Rating
- : MediumMorningstar Uncertainty Rating
What We Thought of Bank of Montreal’s Earnings
Bank of Montreal BMO reported strong fiscal second-quarter results, as adjusted earnings per share of C$3.67 rose 40% from the year-ago quarter. The results translate to an adjusted return on equity of 13.5%, improving 370 basis points year over year, though still below the 15.0% medium-term target.
Why it matters: Adjusted earnings growth was particularly strong in the wealth management and capital markets segments, up 39% and 46% compared with the prior-year quarter. Canadian banking segment adjusted earnings rose 15% year over year, with pretax preprovision earnings growth of 5% and a 15% decline in provisioning expense.
- Growth in assets under management of 30% year over year was a standout, aided by BMO’s leading exchange-traded fund share in the domestic market.
- The US balance sheet optimization is nearly complete. BMO expects to close its sale of certain US branches to First Citizens as well as its transportation and vendor finance loan portfolio divestiture in the fourth quarter. We will monitor its US profitability progress toward its low-50s efficiency and 12% ROE targets.
The bottom line: Following second-quarter results, we plan to increase our C$175/USD 126 fair value estimate for narrow-moat-rated Bank of Montreal by around a low-teens percentage. We also plan to decrease our Morningstar Uncertainty Rating for BMO to Low from Medium. We continue to view the shares as overvalued.
- The valuation increase is driven by a reduction in our cost of equity assumption and higher near-term fee income growth in the wealth management and capital markets businesses. We plan to decrease our cost of equity assumption for BMO to 8.6% from 9.0%, reflecting an updated view of the bank’s business mix and cyclicality.
- The Uncertainty Rating change reflects both qualitative and quantitative factors, including a more favorable assessment of BMO’s domestic earnings quality.
