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The Bank of Montreal (BMO), is the fourth-largest Canadian bank. It offers a wide range of retail banking, wealth management and investment-banking products and serves more than 12 million customers. The bank conducts business through three operating groups

Personal and commercial banking
Wealth management
BMO capital markets

CEO William Downe commented in BMO’s Annual Report, “In 2015, adjusted annual net income grew by 4% year over year in Canadian Personal and Commercial Banking, by 9% (on a U.S. dollar basis) in U.S. Personal and Commercial Banking and by 13% in Wealth Management, while BMO Capital Markets earned over $1 billion for the third consecutive year.” …

Interest rates and the Canadian economy

Canada experienced a technical recession in 2015, defined as two consecutive quarters of contracting GDP. This is not surprising, as the energy sector accounted for just under 30% of Canada’s 2014 GDP in goods-producing industries. This weighed heavily on BMO, while it fell 16.6% in 2015.

Fortunately the Canadian economy has recovered recently. In March, the country exceeded jobs expectations by a wide margin and unemployment was lower. This month, the Bank of Canada upped its forecast for annual GDP growth to 1.7% from 1.4%. The Bank reasons that further economic recovery in Canada will lead to potential interest rate hikes. …

Energy

Another primary concern is the bank’s exposure to the energy sector. Any investment in BMO is going to be heavily leveraged to the Canadian economy, which is largely dependent on oil. However, BMO’s direct exposure to energy­ related businesses remains relatively low at around 2% of total loans made to the sector. This is a huge positive in quelling concerns about BMO’s loan portfolio relating to energy exposure. …

The dollar

The Canadian dollar is up almost 15% vs. the U.S. dollar since its low in January. Prior to this most recent rally, the Canadian dollar was at a 12-year low. This presented significant challenges for BMO in 2015.

On the positive side, BMO has exposure to the U.S. to hedge against currency risk to the Canadian dollar. The company currently serves over two million customers in the U.S. …

Dividends

One of the attractive reasons for looking into BMO is the dividend yield, currently at 3.8%. The dividend has been paid since 1829, the longest-running dividend payout record of any Canadian company. The payout ratio in recent years has stayed between the comfortable 40%-60% range and management seems to be committed to the long-term track record of rewarding shareholders. BMO’s dividend growth rate has slowed to a five-year average of 3.0% vs. the 15-year average of 8.2%...

...Interest rates, energy, and the Canadian dollar will all continue to impact BMO. All of these inputs are near-record or decade lows, contributing heavily to the decline in share price. Recent rallies of these inputs have helped BMO appreciate to over 15% year to date…


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