News & Analysis » Canada

BMO Financial Group research and analysis

Contributed by eResearch

BMO Financial Group (BMO) reported cash EPS for Q3/12 of $1.51. Adjusted EPS, which excludes other items noted below, was $1.49, up 11% Y/Y. Although net income increased 18% Y/Y, the EPS was impacted by a 7% increase in the average number of common shares outstanding which were issued in the Marshall & IIsley Corporation (M&I) acquisition. The quarter was about $0.04 per share higher than we expected and $0.10 per share higher than consensus. Adjusted ROE decreased to 15.2% from 15.4% last quarter. Management announced an increase in BMO’s quarterly dividend per share of 2.8% to $0.72 ($2.88 annually) from $0.70 ($2.80 annually). Management also announced a new targeted dividend payout range of 40% to 50%, down from 45% to 55% previously.

The quarter benefited from a lower income tax rate which added about $0.04 per share to earnings and accounted for most of the higher than expected earnings in the quarter. Wealth Management earnings were weaker sequentially driven by lower earnings from BMO Life. Personal & Commercial (P&C) Canada earnings increased by a modest 3% Y/Y and were basically in line with expectations. BMO Capital Markets had a decent quarter although investment banking revenue was lower Y/Y.

Our fiscal 2012 EPS estimate has been maintained at $5.75. Our 2012 EPS reflects (i) the expected small dilutive impact from the Marshall & IIsley Corporation (M&I) acquisition, (ii) slower loan growth and continued spread pressures, (iii) a modest increase in Capital Markets activity and (iv) slightly higher PCL. For fiscal 2013, we have maintained our EPS estimate at $6.05 based on lower loan growth overall and continued margin pressures. The earnings growth over the two year period is expected to average about 7% annually.

We have maintained our target share price at $60.00. Our Hold recommendation remains unchanged. In our view, the stock is not a compelling investment given the risks associated with the integration of the M&I acquisition and slower expected loan growth. We continue to believe banks, generally, will face strong headwinds with higher risks associated with Eurozone uncertainties and the U.S. regulatory environment.

We believe that the dividend will now be maintained at the current level until mid-2013. The payout ratios on our 2012 and 2013 EPS estimates are 50% and 48% respectively. We would also note that based on our estimates, the forecast payout ratios are approaching the upper-end of management’s new targeted dividend payout range of 40% to 50% of earnings.