After taking a fresh look at Bank of Montreal, we are slightly increasing our fair value estimates to CAD 146 and USD 102 from CAD 145 and USD 102. We also maintain our narrow moat and Standard Morningstar capital allocation ratings. We view shares as fairly valued.
Key Morningstar Metrics for BMO Financial Group
We believe that BMO has a narrow moat derived from cost advantages and switching costs. BMO has the most exposure to the US (over 40% of earnings) compared with its Canadian peers, and BMO has been working to turn around its US banking returns after disappointing performance in 2024. We think its legacy franchise in the Midwest has strong deposit market shares and has lower funding costs than some of its peer US regional banks. However, its 2023 acquisition of Bank of the West has been somewhat disappointing, with the management team delaying its revenue synergy target by one year to the end of fiscal 2026. BMO targets to improve its US banking segment profitability and achieve its 12% segment ROE in the medium term (compared to 6% in fiscal 2024). Apart from credit normalization, we would look for areas in terms of branch productivity, market share gains, and execution of cross-selling. We view improvement in the US banking segment as the key to lifting BMOs’ returns.
Our fair value estimate implies 1.9 times tangible book value as of January 2025 or 13.6 times our 2025 earnings per share estimate. We forecast the bank to generate roughly 4% loan growth over the next five years, and we project its net interest income to grow at 4.8% CAGR over the same period. We think the bank’s credit costs should be peaking in 2025 after underperforming its Canadian peers in fiscal 2024. BMO historically has not enjoyed superior operating efficiency, but we think its acquisition of Bank of the West gives it a better scale in the US, and we view BMO as closer to its peers’ operating efficiency through the cycle. We forecast BMO’s normalized return on tangible equity at 14%, well above our assigned cost of equity of 9%.
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