Bank of Montreal: Prepare for Rising Rates with this Sleeper Pick

·3 min read

Bank of Montreal (CA: BMO), the fourth-largest Canadian bank by market cap—which derives a fairly even mix of revenues from Canada and the U.S.—has been on an unstoppable rally of late, surging 68% over the past year on the back of fading pandemic headwinds.

With all the chatter about inflation and the prospect of higher interest rates, Bank of Montreal's first two quarters of 2021 may very well be a mere preview of what's to come as the economy continues its recovery from the COVID-19 crisis. (See Bank of Montreal stock analysis on TipRanks)

Another Earnings Beat

Late last month, Bank of Montreal came off a pretty solid second quarter. The bank clocked in adjusted EPS numbers of C$3.13—up a staggering 202% year-over-year—beating the consensus estimate that called for C$2.77 in per-share profit.

Arguably, the brightest part of the quarter was the massive reduction in provisioning activity. Provisions for credit losses (PCLs) nosedived to C$60 million, down considerably from the C$1 billion in provisioning suffered during the same quarter last year.

Pre-tax, pre-provision profit (PTPP)—revenues minus expenses, provisions excluded—were also better than the Street was anticipating. PTPP was up 38% year over year, thanks in major part to strength in Bank of Montreal's capital markets business and better operating leverage of 13%.

The better-than-expected PTPP numbers suggest management did a spectacular job of controlling expenses amid the pandemic. That is quite remarkable, given that the Bank of Montreal was more sensitive than most of its peers to the COVID-19 pandemic's impact.

Impressive Recovery

It's not a secret that Bank of Montreal did not have the best loan mix going into last year's coronavirus panic. The bank's oil and gas loan book didn't look in great shape as oil prices nosedived, eventually plunging into negative territory for a moment. That's a major reason why BMO stock took a harder hit than its peers during last year's sell-off.

But that was then and this is now. Today, oil prices are in full-on rally mode, with WTI, one of the main oil benchmarks, now above the $70 mark. The explosive move in oil prices has taken a considerable amount of pressure off the backs of many ailing oil and gas companies to which Bank of Montreal extended credit before 2020. And just like that, Bank of Montreal looks like the Canadian bank to bank on, for the post-COVID-19 world.

Wall Street's Take

According to TipRanks’ consensus analyst rating, BMO stock comes in as a Moderate Buy. Out of 10 analyst ratings, there are 7 unanimous Buy recommendations.

As for price targets, the average analyst BMO price target is C$136.00. Analyst price targets range from a low of C$126.00 per share to a high of C$145.00 per share.

Conclusion

Moving forward, Bank of Montreal could continue to outperform its Big Five peers, as the Fed goes from just thinking about raising rates, to warning investors that rate hikes are coming, to acting on their promise.

Once rates rise, the big banks have some wiggle room to expand upon their net interest margins (NIMs). Given that the Bank of Montreal has a greater mix of deposits than some of its peers, it has the means to expand NIMs to a greater extent. BMO could well continue to show solid gains in the coming quarters.

Disclosure: Joey Frenette owned shares of Bank of Montreal at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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