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BMO AT A GLANCE

P/E ► 14.1 AVG EV/EBITDA ► 3.23 AVG ROA ► 2.6% AVG ROE ► 11.1% AVG Debt to Equity ► 22.0 AVG Current Ratio ► 0   Interest Coverage Ratio ► 1.24 AVG

 

 

 

 

 

 

Bank of Montreal (TSX: BMO, NYSE: BMO) is one of the "Big Five" Canadian banks, along with Toronto-Dominion Bank (TD), Scotiabank (BNS), Canadian Imperial Bank of Commerce (CM), and Royal Bank Of Canada (RY). BMO ranks fifth out of the five banks in market cap and net income.^[1]

The Big Five have not been immune to the 2008 Financial Crisis, as TD, RY, and CM wrote down more than C$ 2 billion. BMO has written down C$ 638 million from Q3 2007 to November 19th, 2008, and has had to cut its mortgage rates.^[1] However, Canadian banks have a stronger banking system than U.S. banks; Canadian banks have written down C$16.17 billion compared to the total number of dollars globally written down by banks -- USD$720 billion.^[2]

To maintain the strength of its banks, Canada has hinted that it will raise the Tier 1 Capital Ratio % requirements from 7% to 10%. The ratio is a measure of equity and retained earnings to risk-adjusted assets and provides a general guide for determining a bank's financial health.^[3] In 2008, BMO had a Tier 1 ratio of 9.4%,^[4] and will raise C$ 1.1 billion in proceeds by selling shares at a lower price to get above 10%.^[4] Additionally, BMO, like the rest of the Big Five, must adjust to fluctuating currency rates. From 2007 to 2008, the CAD/USD ratio decreased from 1.093 to 1.032.^[1] This caused BMO's Canadian Dollar (CAD) equivalents of their USD revenues, net income, income taxes, and provision for credit losses to fall in value relative to 2007.^[1] To offset potential exchange risk, BMO follows a hedging plan tailored to USD/CAD fluctuations per quarter. BMO could not offset the weakening U.S. dollar in 2008, as their hedging procedures resulted in a loss of C$11 million, compared to a C$ 14 million gain in 2007.^[1]

Business Financials

Bank of Montreal, together with its subsidiaries, operates in four business segments.

Personal and Commercial Banking (59.1% of Total Revenue, 71.6% of Net Income)^[5]

The Personal and Commercial Banking segment provides personal and business banking products, including deposit accounts, loans and credit cards, insurance products and personal investment products.^[1] It also offers deposit and investment services, mortgages, consumer credit, business lending, cash management, commercial and capital markets products and financial advisory services and other banking services. From 2007 to 2008, P&C net income increased 2.4%.^[1]

Private Client Group (20.2%% of Total Revenue, 20.0% of Net Income^[5]

The Private Client segment provides wealth management products and solutions, including full-service and direct investing and private banking and investment products.^[1] Its products include investment and wealth advisory, brokerage, direct investing, and mutual funds. From 2007 to 2008, Private Client Group net income remained at $395 million.^[1]

BMO Capital Markets (23.6% of Total Revenue, 35.0% of Net Income)^[5]

The Investment Banking segment offers financial instruments, including equity and debt underwriting, corporate lending and project financing, mergers and acquisitions advisory, merchant banking, securitization, treasury and market risk management, debt and equity research, trade finance and risk mitigation and institutional sales and trading. It also provides integrated debt, foreign exchange, interest rate, credit, equity, securitization and commodities products to wholesale, commercial and retail clients; merchant banking services that include the sourcing, structuring and financing of private equity investments; and products that use credit as a tool for asset management.^[1] This segment also serves clients in the United Kingdom, Europe, Asia and Australia. From 2007 to 2008, BMO Capital Markets net income increased 65.9% due to creating the BMO Lifestages Plus fund, which raised over C$1 billion in 14 months.^[1] The segment was named Canada's best investment bank by Global Finance magazine.^[1]

Corporate Services

The Corporate Services segment provides two for the BMO Financial Group using technological and operational expertise. It boosts an array of business areas, including corporate communications, risk management, and law.^[1] This segment also has a Technology and Operations business, which provides information technology and logistical analysis to the Financial Group. From 2007 to 2008, Corporate Services had a loss in net income of $461 million. The segment was hit hard by the higher provisions for credit losses, including a C$260 million increase in the general allowance.^[1]

BMO has a large Canadian clientele, and has branched more offices in Chicago to improve it's U.S. client base.^[5]

From 2007 to 2008, BMO total revenue increased 9.7%, total cost increased 13.9% and net income decreased 4.8%.^[5]

Trends and Forces

BMO adjusts to 2008 Financial Crisis

Canadian banks have not been immune to the 2008 Financial Crisis as Royal Bank Of Canada (RY), Toronto-Dominion Bank (TD), and Canadian Imperial Bank of Commerce (CM) have written down more than C$2 billion.^[1] Canadian banks, such as BMO, lowered their mortgage rates in response to a drop in borrowing costs in the bond market, which banks use to finance their mortgage lending. BMO's three year loan fell six tenths of a point to 6.45 per cent, while a five year mortgage dropped a quarter point to 6.95 per cent.^[6] BMO had also still been recovering from the 2007 Credit Crunch, as the bank had written down C$ 638 million from Q3 2007 to Q3 2008.^[7]

Canadian Banks are Seen as Less Risky than American Banks

Canadian banks as a whole have lost $11.7 billion due to subprime investments^[8] -- compared to over $592 billion that U.S. banks have lost.^[9] Further, the World Economic Forum published its survey of 12,000 corporate executives in October 2008, which showed that these company heads ranked Canadian banks as the soundest in the World; US banks ranked 40th on the list. Canada achieved a score of 6.8 (7.0 indicates a perfect score). In comparison, the US scored 4.0.^[10] Canadian banks have also profited from winning deposits and accounts as clients leave shaky U.S. banks.^[11]

Canadian banks must meet Canada's Tier 1 Capital Ratio% requirements.

Canada requires banks to maintain a tier-1 capital ratio of at least 7%. The ratio is a measure of equity and retained earnings to risk-adjusted assets and provides a general guide for determining a bank's financial health.^[3]

In 2008, BMO had a Tier 1 ratio of 9.4%.^[4] That compares with a ratio of 10.5% posted by fellow Big Five Canadian Bank Canadian Imperial Bank of Commerce (CM). To raise its Tier 1 above 10%, BMO announced it will raise C$ 1.1 billion in proceeds by selling shares at a lower price.^[4] BMO will sell shares at $30 each, more than 10% lower than the closing price on 12/9/08 following a 42% fall this year.^[12] The plan made BMO the last of the Big Five to issue common equity in 2008.^[12] The move will raise BMO's Tier 1 to 10.4%.^[4] However, the raise in capital came at a price, as BMO gained a spread of -114 between common and preferred equity.^[13] The spread indicates the difference between how much common shares yield in trading and how much preferred shares yield. In theory, a company would like to reward their preferred shareholders a higher return than common shareholders.^[13] The rest of the Big Five each have a positive spread greater than 100.^[13]

BMO performance is correlated to currency rates relative to the Canadian Dollar (CAD)

From 2007 to 2008, the CAD/USD ratio decreased from 1.093 to 1.032.^[1] This caused BMO's Canadian Dollar (CAD) equivalents of their USD revenues, net income, income taxes, and provision for credit losses to lower in value relative to 2007.^[1] To offset potential exchange risk, BMO follows a hedging plan tailored to USD/CAD fluctuations per quarter. BMO could not offset the weakening U.S. dollar in 2008, as their hedging procedures resulted in a loss of C$11 million, compared to a C$ 14 million gain in 2007.^[1]

^[14]

Competition

Financial Services

• Bank Of Montreal (BMO) -- Canada's fourth largest bank in terms of assets.^[1]
• Bank of Nova Scotia (BNS) -- Canada's third largest bank similarly offers commercial, retail, and investment banking products.^[15]
• Toronto-Dominion Bank (TD) -- Canada's second largest bank in terms of assets.^[16]
• Royal Bank Of Canada (RY) RY is Canada's largest bank in terms of total assets and market cap.^[17]
• Wells Fargo (WFC) -- The first bank in the U.S., WFC offers financial products ranging from retail mortgages to small business loans to insurance products.^[18]
• Bank of America (BAC) -- BAC has about half of all the wealthy households in the U.S. as customers, and holds the leading share of the market for small business banking.^[19]
• Citigroup (C) -- The world's most diversified financial services firm, C competes with BNS in retail and commercial segments.^[20]

Market Share

As Canada's fifth largest bank in terms of total assets and market capitalization, BNS is smaller than Bank Of Montreal (BMO) and Canadian Imperial Bank of Commerce (CM) but smaller than Toronto-Dominion Bank (TD) and Royal Bank Of Canada (RY). These five banks, all included in Forbes Top 200 Banks, dwarf the remaining 14 domestic banks in terms of market cap and assets. In a Forbes Global 2000 ranking of banks, BMO ranked 182 compared to 55 by Royal Bank Of Canada (RY), 92 by Scotiabank (BNS), 95 by Toronto-Dominion Bank (TD), and 159 by Canadian Imperial Bank of Commerce (CM).^[30]

References

1. ↑ ^{1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 1.19} BMO 2008 Annual Report
2. ↑ Bloomberg "Royal Bank Drops Forecast as Writedowns Cut Profit" By Doug Alexander, Dec. 5, 2008
3. ↑ ^{3.0 3.1} Financial Post, "10% tier 1 ratio will be costly for Scotia," 12/10/08
4. ↑ ^{4.0 4.1 4.2 4.3 4.4} Financial Post, "Bank of Montreal Announces Common Share Issue," 12/15/08
5. ↑ ^{5.0 5.1 5.2 5.3 5.4}
6. ↑ MetroNews, "Canada's Big Banks Cut Mortgage Rates," 11/27/08
7. ↑ Seeking Alpha, "The Year of the Canadian Bank Writedowns, 11/20/08
8. ↑ Forbes, "In Crisis, Canadian Banks Strive and Thrive," 12/11/08
9. ↑ Seeking Alpha, "Subprime Writedowns and Losses for Major Financials," 10/31/08
10. ↑ Reuter’s “Canada rated world’s soundest bank system: survey” October 2008
11. ↑ Seeking Alpha, "Canadian Banks Benefit from Market Turmoil," 11/01/08
12. ↑ ^{12.0 12.1} National Post, "Banks told to bulk up reserves," 12/16/08
13. ↑ ^{13.0 13.1 13.2} Seeking Alpha, "Canadian Banks Competition for Capital," 12/22/08
14. ↑ [http://ca.moneycentral.msn.com/investor/quotes/quotes.asp?Symbol=/usdcad MSN Money, CAD/USD Quotes
15. ↑ Scotiabank website
16. ↑ ^{16.0 16.1} TD 2008 Annual Report
17. ↑ ^{17.0 17.1} RBC 2008 Annual Report
18. ↑ Wells Fargo website, "About Us"
19. ↑ Bank of America website, "About Bank of America"
20. ↑ Citigroup website, "About Us"
21. ↑ BNS 2007 Annual Report
22. ↑ WFC 2007 10-k, Item 6: Selected Financial Data, page 14
23. ↑ BAC 2007 10-k, Item 6: Selected Financial Data
24. ↑ Citigroup 2007 Annual Report
25. ↑
26. ↑ Bank of Nova Scotia FY 2008 10-K
27. ↑ Bank of Montreal FY 2008 10-K
28. ↑ TD FY 2008 10-K
29. ↑ CIBC FY 2008 10-K
30. ↑ Forbes Global 2000 Ranking