Author Topic: BMO - Bank of Montreal  (Read 6872 times)

Viking

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BMO - Bank of Montreal
« on: January 05, 2011, 05:50:04 PM »
BMO looks to be a pretty fat pitch right now (perhaps all the Canadian banks?). Solid, well capitalized bank; PE = 12; div yield close to 5% and near term growth = 12%. Looks like a pretty solid bet to earn a risk averse investor a total return of 15% per year (with additional upside should Mr Market decide to increase PE to 13 or even 14).  

Over the past year I have been thinking about WFC as a play on the economic recovery in the US; I wonder if BMO is not a better way to do this.

Why hold a BMO bond? The stock yields 5% and you get all the capital gains...

BMO Current price = $57.72
2010 Earnings = $4.75/share (YE = Oct 31)
PE = 12.15
2010 Dividend = $2.80 (payout ratio = 59%)
Yield = 4.85%

Discussing Fiscal Q4 results in Dec current CEO:
1.) raised EPS guidance from 10 to 12% (average rate over next few years)
2.) raised ongoing ROE target to 17 to 20% (avg rate over next few years)

Canada (consumer) has been performing well. They are looking for Canadian business borrowing to improve (as confidence returns). They are also expecting US consumer and business to improve in 2H 2011. They also expect loan loss provisions to swing from being a headwind to a tailwind.

Bottom line, they feel all of their businesses are in very good shape and are very well positioned to grow over the next 3 to 5 years. Pretty bullish.

And yes, in mid Dec they announced a large US aquisition. This will create some near term noise as the aquisition was paid for with equity and the new business will not contribute to earnings in 2011. However, in 2012 earnings will likely be up 20%...  

Here is the link to their annual report which has great current info: www2.bmo.com/content/0,1089,divId-3_langId-1_navCode-3198,00.html
« Last Edit: January 05, 2011, 05:56:08 PM by Viking »


biaggio

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NormR

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Re: BMO - Bank of Montreal
« Reply #2 on: January 07, 2011, 07:09:26 AM »
Humm, I've been thinking about lightening up.  But I tend to pay more attention to book value when it comes to banks.  At least when it comes to entry points.  It seems that the banks go on sale for less than book value a few times a decade.  BMO being a nice case in point in early 2009 when I "pounded the table" on Canadian banks in general.  I'm not nearly as bullish on them at this point.   


biaggio

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Re: BMO - Bank of Montreal
« Reply #3 on: January 08, 2011, 06:11:54 AM »
I have been reading up on BMO.

I understand the proper metric for valuing a bank is BV. Fair value for BMO I would think would be 1.5-2 x BV considering that it will earn 15-18%ROE and has sold for >2 x BV in past. Currently selling around 1.6 BV.


But can you not also estimate IV by looking at ROA + total assets? How does one go about this? For instance if average ROA is 0.7% + total assets are $411 B, would you multiply $411B by .7%, then divide by # of shares to get earnings power per share. In this example it would work out to $5.11/share.

Then if you estimate growth of 12% per year x 5 years , with discount rate of 10%, can you say that BMO has an IV of $97/share.

Viking, how you lay it out makes sense + appeals to me I am just to put a rough estimate of fair value or an IV figure that I can anchor to. I found that this has served me well to get my emotion out of it when or if things turn poorly with the market price. (I write it out in a log, so I can look back + see if I am wrong or look to see where I went wrong)

SharperDingaan

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Re: BMO - Bank of Montreal
« Reply #4 on: January 08, 2011, 06:37:59 AM »

You might want to dig a little deeper.

- 2 of the 5 actually have more branches in the US than they do in Cda. They are now effectively US banks regulated by Canada (OSFI), & represent the best of both worlds.
- Lot of Cdn regulators sounding warning bells, so expect Cdn loan loss provisions to rise. The 2 banks above may actually have net reductions if the US improves relative to 2010.
- Div increases are likely to be restrained for some of the 5. Looking to the Cdn Life Insurance sector is likely to be both more certain & more rewarding.

As always, a little due diligence can take you a long way

SD

biaggio

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Re: BMO - Bank of Montreal
« Reply #5 on: January 08, 2011, 06:50:38 AM »
BMO, and other Canadian banks appear to be great businesses in that even though their management does stupid things (numerous blow ups in the past as noted above) they always bounce back and are very profitable thanks to the oligopoly position they have here in Canada.

Their latest move, which has caused recent mini sell off seems to be the purchase of M&I.

Details are here http://www2.bmo.com/bmo/files/event/3/1/Investor%20Presentation_MI_Dec19.pdf.

They appear to be doubling down in the U.S. The street hated the deal. BMO seems to be in agreement with other successful business men like Berkowitz in purchasing U.S. financial assets. CEO says that this is the best time to buy in the last decade. They have had success in the past + experience with Harris Bank. They have done their due diligence. CEO is estimating IRR of 15% on the deal Can we trust them?

My questions are:
-they estimate total losses on the portfolio they are acquiring at $4.7B (some have have said that this is an overestimate.
-they are paying back the TARP money in full
-purchase price=$4.1 B in BMO share + $1.7 B tarp + known losses in future of $4.7B=$10.5B for 374 branches, $52B in assets- Is this the right way to look at purchase price? This is how I would look at it if I was buying a lemonade stand.
They will have to earn 2% ROE ($52B x .02=~ $1B) just to get 10% return on the $10B. On average M&I has never earned 2% on assets
Are they getting a good deal? Or is the CEO just "empire building"
Am I using the ROA right?
M&I had some bad deals in the southern US just prior to finacial blow up (prior to this I read that M&I was a conservative well run bank in the US midwest)-does anyone know if these have been written off? or will BMO be on the hook for them? Have their books been scrubbed + cleaned up? I believe that this has been part of  Bruce Berkowitz's investment theme in purchasing the financial companies he has been buying.

Having just read Davis Dynasty, buying great financial companies with a margin of safety and holding for the long term is a great way to build wealth.

Baoxiaodao

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Re: BMO - Bank of Montreal
« Reply #6 on: January 09, 2011, 11:53:59 AM »

You might want to dig a little deeper.

- 2 of the 5 actually have more branches in the US than they do in Cda. They are now effectively US banks regulated by Canada (OSFI), & represent the best of both worlds.
- Lot of Cdn regulators sounding warning bells, so expect Cdn loan loss provisions to rise. The 2 banks above may actually have net reductions if the US improves relative to 2010.
- Div increases are likely to be restrained for some of the 5. Looking to the Cdn Life Insurance sector is likely to be both more certain & more rewarding.

As always, a little due diligence can take you a long way

SD

Sounds to me a university professor preaching to mid-school students. There is nothing wrong to share your insights, but what is the point to make your statements this way? SD, I have suffered on my Delti thread, why do not you just spare other people express their opinions without your official 2-cents?

I have wanted to say that for a long time, and this makes me feel good.


rmitz

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Re: BMO - Bank of Montreal
« Reply #7 on: January 09, 2011, 02:42:02 PM »
Sounds to me a university professor preaching to mid-school students. There is nothing wrong to share your insights, but what is the point to make your statements this way? SD, I have suffered on my Delti thread, why do not you just spare other people express their opinions without your official 2-cents?

I have wanted to say that for a long time, and this makes me feel good.

I'm not sure what you're seeing here, but I don't read SD's statements this way at all.  Just to add a datapoint.

SharperDingaan

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Re: BMO - Bank of Montreal
« Reply #8 on: January 09, 2011, 03:47:28 PM »

The point is to make you think, & do your own DD.

This is not mid-school & there is no spoon feeding. Trying to substitute metrics for actual thought will rapidly make you poorer, & the rest of us richer - its just that most of us have the maturity to recognize that we would prefer not to do it off the skin of fellow board members.

A very basic read through the financials would tell you that BMO & CIBC are primarily trading banks with deposit taking offsetting some of their risk. TD, RBC & BNS are primarily deposit taking banks that also do trading. Compare apples to apples.

TD & RBC are effectively bigger (by branches) in the US than Canada, & their provisioning is higher because US borrower risk sucks relative to Cdn comparables. A concurrent small improvement in US borrower risk, & decline in the Cdn comparable is likely to wash. For BMO its likely to result in additional provisioning.

Dividend increases are more likely from TD, RBC & BNS than from BMO. The most likely candidate in both reliabilty & magnitude is MFC. Different financial sector.

SD

biaggio

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Re: BMO - Bank of Montreal
« Reply #9 on: January 09, 2011, 04:28:27 PM »
Sharper, are you saying that BMo will have to take more provisions because of the acquisition of M&I's portfolio of loans-as the avg US borrower is improving. Or are you saying that they have not taken enough provisions here in Canada +  we expect a deterioration in the Canadian borrower.

I would have thought that we have been thru the worse + with the economic recovery that borrowers will be in better shape in US + Canada. Lenders (banks) will make money by borrowing at next to nothing and lending out at lower interest rates.

I have owned TD in past. BMO seems interesting as they have the same advantages but seem cheaper.