Q1 bank results: BMO's exceptional at balancing

They maintain a good balance between segments such as their wealth management and capital markets group, says Dan Werner, equity analyst.

Ashley Redmond 3 April, 2014 | 6:00PM Dan Werner

 

 

Ashley Redmond: I'm Ashley Redmond for Morningstar.ca, and I'm here with equity analyst, Dan Werner.

Dan, thanks so much for joining me.

Dan Werner: Thanks, Ashley.

Redmond: We just did a wrap-up of the big Canadian banks for this fiscal quarter, and they all reported pretty solid results. We're going to focus on one bank right now, and we're going to talk about BMO. You thought their results particularly stood out. Why was that?

Werner: BMO has done a good job in balancing – a lot of the Canadian banks have been trying to build their fee incomes – the fee income, fee revenues, and BMO does a really good job of balancing that all out.

The Canadian Personal and Commercial Banking segment is still the largest segment for BMO, but they still get 45% of their revenues from their wealth management and their capital markets group. They have really good balance – and those two segments for BMO did particularly well this last quarter, and that contributed to their overall solid results.

Redmond: Okay. And it's been a couple of years since BMO completed the acquisition of M&I Bank in the U.S. So, how are the acquisitions going so far?

Werner: Well, in terms of M&I, I wouldn't say that the M&I acquisition was a spectacular success, but I also won't say that it was terrible, primarily because of pricing and what BMO paid for it. BMO, since acquiring M&I, probably has retained a lot of the commercial relationships, but they have not had the operating leverage, positive operating leverage, in the U.S. segment, I think, that they hoped they have had.

But a big part of why they bought M&I was the wealth management aspect of it. M&I brought $50 billion of assets under management to BMO's family and that adds a lot of fee income. They've done very well in terms of retaining those assets and growing those assets in the U.S., and it still remains as I said before a big driver for their revenues.

Redmond: Can we circle back to the Wealth Management segment that you touched on. Can you tell us a little bit more about that?

Werner: It's always been a focus of not just BMO, but all the Canadian banks in terms of trying to build that fee business and there are a lot of reasons for that. It helps solidify the relationship with the customers. It helps its low capital intensity and it's very profitable for them. So, BMO along with all of the other Canadian banks try and build up that business because of those factors.

They recently announced an acquisition for the oldest investment fund in the United Kingdom, which is called F&C Asset Management. They're primarily a fixed income asset manager and at the time of announcement their assets under management plus BMO's would have been – they would have roughly doubled BMO's assets under management.

Since that announcement, there have been rumours about other buyers for it. They've also had – since its fixed income some of those assets have flowed out. So it kind of remains to be seen in terms of how good a deal this is for BMO, but the price that they initially announced wasn't a big price, and I think that's kind of the key to what they do. They don't overprice things or pay too much for different assets and that's the case with this.

Redmond: Okay. And BMO did not increase its dividend this quarter. So, are you expecting them to increase it in Q2?

Werner: If they achieve a net income or earnings per share of C$1.60, I think it's a strong possibility that they will increase the dividend, if not in second quarter, I definitely see it by third quarter.

Redmond: Okay, great. Thanks so much Dan.

Werner: Thanks, Ashley.

Redmond: To see Dan's reports, go to Stocks page at Morningstar.ca.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Bank of Montreal92.00 CAD-1.14

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Ashley Redmond

Ashley Redmond  Ashley Redmond is a Vancouver-based freelance writer.