BMO: Stock of the Week

We lowered our fair value estimate on BMO stock as high interest rates begin to hurt.

Andrew Willis 12 June, 2023 | 4:21AM
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Andrew Willis: Even after a generous dividend, we’re lowering our fair value estimate for Bank of Montreal stock (BMO). Canadian banks have done well these past few years, but the good times must come to an end when borrowers can’t borrow anymore.

While it’s hard to be compassionate to banks when you pay them interest, they will suffer from those of us who might not be able to make our payments. There are still a lot of mortgages that haven’t yet reached their renewal dates and there will likely be losses for BMO to absorb. However, the outlook is mixed and there are reasons we still see BMO stock as undervalued.

We lowered our fair value estimate on BMO stock, but we’re not necessarily saying that the bank’s written cheques it can’t cash. They now face a more difficult environment and we see lower interest revenue. Meanwhile, the bank has a smaller exposure than most peers to susceptible areas like Canadian housing.

BMO does have quite a bit of commercial lending in the U.S., however, sector strategist Eric Compton says that the bank has so far avoided mistakes other banks have made in attempts to expand south. He did say that the recent acquisition of Bank of the West made for “messy” results and lower earnings, but there should be cost savings by 2024 – and they do get nearly 2 million customers out of the deal.

For Morningstar, I’m Andrew Willis.

bulls Bulls Say

  • Growth and opportunities in the bank's U.S. markets will outweigh any slowdown in its native Canada as U.S. subsidiaries gain market share.
  • Compared with its peers, BMO has a lower exposure to the Canadian housing market.
  • BMO's presence in the Canadian ETF market should pay off as passive investment options gain share in Canada over the next decade.

bears Bears Say

  • The housing market in Canada is starting to heat up again, increasing potential risks for the economy and the banking sector.
  • BMO's acquisition of Bank of the West increases execution risks and has created messy quarterly results which require a lot of adjustments that can be difficult to interpret.
  • Higher interest rates and rising amortization periods for mortgages show the Canadian consumer is set to come under increased strain for the foreseeable future.

 

Editor's Note: All images are courtesy of Unsplash.com and AP Images. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Bank of Montreal118.09 CAD1.04Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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