Morningstar | Solid Third-Quarter Results for BMO; Slight Increase to Our Fair Value Estimate
Narrow-moat rated Bank of Montreal reported solid fiscal third-quarter results that do not alter our long-term thesis on the company. We are increasing our fair value estimate to CAD 107/$83 from CAD 105/$82. One-time charges largely disappeared, and solid net income growth in both Canada and the U.S. helped the bank achieve positive income growth and operating leverage year over year for all segments. Adjusted return on tangible equity was 18%, identical with last quarter. Adjusted net income increased 14% year over year, while adjusted earnings per share were up 16%. We like the bank’s consistency in Canadian P&C, with expenses continuing to rise slightly less than revenue, and both the U.S. unit and the Wealth unit are poised to deliver net income growth for year. We believe the bank remains well on track to deliver consistent EPS growth in the midsingle digits and returns on equity of 14% or more.BMO’s U.S. unit once again saw outsized balance sheet growth, with average earning assets expanding at an annualized 11.7% rate quarter over quarter. This more than offset the NIM contraction for the segment. Average residential mortgage balances in Canada were once again down slightly quarter over quarter. This fits well with our overall Canadian thesis of slowing growth, particularly for retail-related loans, and we even view it as a positive sign that BMO is not reaching out on the risk curve to boost growth here. The capital markets segment’s net income remained range bound, as the bank has struggled to produce consistent growth here. Wealth management’s results were okay, as assets under management were up 9.7% annualized quarter over quarter, however, this did not translate into growing net income for the segment. Finally, credit quality remained strong, with the provision for credit losses ratio remaining range-bound in the upper-teens, gross impaired loans decreasing during the quarter, and delinquencies generally improving across the consumer portfolio.
Bank of Montreal is a financial services organization. Co. provides a range of retail banking, wealth management and investment banking products and services. Co. serves its clients through three operating groups: Personal and Commercial Banking, which provides financial services to personal and commercial customers; Private Client Group, which provides wealth management products and services to individuals and select institutional segments; and BMO Capital Markets, which provides clients financial and capital markets services to corporate, institutional and government clients.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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