Portfolio Optimization And Digital Expansion Will Strengthen Future Performance

Key Takeaways

• Optimizing portfolio and leveraging Bank of the West acquisition are poised to enhance returns, revenue growth, and net interest margins.
  
• Digital advancements and strategic U.S. customer deposit growth are expected to stabilize margins and return capital to shareholders through increased earnings.
  
• Geopolitical uncertainties, including trade tensions and a challenging credit environment, threaten revenue growth, earnings, and net margins due to increased credit losses and cautious capital deployment.

Catalysts

Provides diversified financial services primarily in North America.

• BMO's plans to optimize its portfolio across both assets and liabilities are expected to improve capital allocation, enhancing returns and potentially increasing net interest margins.
  
• The capture of full revenue synergies from the Bank of the West acquisition, with a focus on commercial, personal banking, wealth management, and capital markets, is anticipated to contribute significantly to revenue growth.
  
• Strategic initiatives to grow core customer deposits in the U.S., particularly through checking and savings accounts, are likely to support net interest margin stability and strengthen long-term revenue.
  
• The expansion of BMO's digital-first agenda and investment in cutting-edge technology, such as joining the IBM Quantum Network, aim to drive new revenue opportunities and improve operational efficiency, resulting in better net margins.
  
• Completion of share buyback programs, enabled by a strong CET1 ratio, is expected to return capital to shareholders and improve earnings per share over the medium term.

Bank of Montreal Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bank of Montreal's revenue will grow by 7.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 25.6% today to 26.4% in 3 years time.
• Analysts expect earnings to reach CA$9.9 billion (and earnings per share of CA$13.89) by about March 2028, up from CA$7.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.9x on those 2028 earnings, up from 13.1x today. This future PE is greater than the current PE for the CA Banks industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.07%, as per the Simply Wall St company report.

Bank of Montreal Future Earnings Per Share Growth

Risks

• The ongoing trade war and potential tariffs between the U.S. and Canada introduce significant uncertainty, which may disrupt capital allocation and lead to clients adopting a more cautious stance on capital deployment, ultimately impacting revenue and earnings.
  
• The possibility of tariffs being implemented in the near future could negatively affect economic conditions, causing variations in provision for credit losses (PCLs) and impacting net margins as economic projections remain uncertain.
  
• The Bank of the West merger's revenue synergies have been slower to develop than expected due to the muted business environment, posing a risk to the anticipated earnings improvement and ROI from the acquisition.
  
• Increased impairment formations and a challenging credit environment, particularly in U.S. commercial and Canadian consumer lending, could lead to higher provisions for credit losses that would negatively impact net income.
  
• The potential for the ongoing geopolitical uncertainty to affect loan growth and client activity, specifically in the U.S., risks stalling revenue growth, which could impede the achievement of the bank's medium-term return on equity targets.

Valuation

• The analysts have a consensus price target of CA$155.2 for Bank of Montreal based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$37.7 billion, earnings will come to CA$9.9 billion, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 7.1%.
• Given the current share price of CA$139.59, the analyst price target of CA$155.2 is 10.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.