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Bank of Montreal Shares Top Peers on U.S. Bet: Corporate Canada

Bank of Montreal (BMO), Canada’s fourth-biggest lender, is poised to be the country’s top-performing bank stock this year for the first time in more than a decade as a U.S. expansion begins winning over investors.

The bank’s 16 percent advance this year is leading Canada’s seven other large lenders, and its stock remains among the cheapest, according to data compiled by Bloomberg. The Toronto-based firm is also beating the 10 percent return of the eight-company Standard & Poor’s/TSX Commercial Banks Index. The bank hasn’t topped the group since 2002, when it gained 16 percent, the data show.

Bank of Montreal turned to the U.S. to help bolster profit through acquisitions, including its C$4.1 billion ($4 billion) takeover of Milwaukee-based Marshall & Ilsley Corp. in July 2011. The purchase, Bank of Montreal’s largest in its 196-year history, doubled its U.S. deposits and branches. The lender has had a presence in the U.S. Midwest since buying Harris Bank for C$718 million in 1984.

“Bank of Montreal made a big push into the U.S. middle market, and that’s what’s gaining traction,” Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier Inc. in Toronto, which manages about C$4 billion including bank shares, said in an Oct. 15 interview. “People who have been negative are grudgingly giving them their respect for what they’ve done with the M&I acquisition.”

‘Good Momentum’

The lender, which has outperformed the Canadian banks index three times in the past decade, has surged to its highest level in six years as it closes in on its April 2007 record of C$72.75. The stock rose 0.6 percent to C$70.66 yesterday in Toronto.

“Investors are recognizing BMO’s diversified North American platform,” Chief Financial Officer Tom Flynn, 50, said in an Oct. 15 e-mail response to questions, citing its “large commercial banking business, good momentum in personal and commercial banking in Canada, a strong wealth franchise and operating leverage from an expanded U.S. platform.”

Bank of Montreal yesterday promoted Frank Techar, who leads the Canadian consumer lending business, to a new role as chief operating officer starting Nov. 1 as part of a plan to consolidate oversight of the lender’s retail businesses. He’ll be responsible for personal and commercial banking as well as wealth management, and will oversee Mark Furlong, head of U.S. retail banking, and Gilles Ouellette, head of the private client business.

Highest Capital

The bank’s Basel III common equity ratio, which measures equity divided by assets adjusted for risk, was 9.6 percent as of July 31, the highest among Canada’s eight biggest banks.

“BMO has consistently been at the high end of the sector in terms of their capital position,” Sumit Malhotra, an analyst with Macquarie Capital Markets in Toronto, said in an Oct. 15 interview. “This has allowed for balanced capital deployment, including a strong level of buyback activity.”

Bank of Montreal said Jan. 30 it planned to buy back as many as 15 million common shares, or 2.3 percent of its stock, over 12 months. The bank repurchased 8 million shares as of July 31.

Bank of Montreal posted record profit in Canadian consumer lending and wealth management in its fiscal third quarter, with U.S. earnings increasing 10 percent from a year earlier. Net income from U.S. consumer lending for the year ended Oct. 31 was C$580 million, lifted in part by M&I contributions, according to financial statements. That was more than double the C$259 million profit from fiscal 2011.

M&I Contributions

“‘Exposure to a recovering U.S. market coupled with the benefit of M&I-related credit recoveries have been positive to earnings,’’ Malhotra said. ‘‘BMO also has the strongest consumer loan growth in Canada of the big five banks, and the most recent quarter showed signs of slowing net interest margin compression domestically.’’

Bank of Montreal was the fifth-best performer last year after its stock gained 8.9 percent, compared with the 15 percent return of top-performer Royal Bank of Canada. Royal Bank has gained 14 percent this year, putting it in second place, while Canadian Western Bank is third with a 12 percent advance.

‘‘It’s a good story: They did a big acquisition, they seemed to have pulled it off, they seem to be making money on it,’’ David Baskin, president of Baskin Financial Services Inc., said in an Oct. 11 interview. ‘‘Good for them, and the stock market’s rewarding them.’’

Credit Reserves

Still, Baskin doesn’t hold Bank of Montreal among the C$541 million his Toronto-based firm manages. While earnings from its M&I acquisition have been better than expected, much of the gain comes from reversing credit reserves taken during the purchase, he said.

‘‘A lot of the earnings that we’ve seen have been because the housing market has recovered and banks have been able to reverse those reserve loans,” Baskin said. “I want to see a normal year.”

While Bank of Montreal is topping other Canadian lenders this year, its stock is underperforming U.S. mid-sized banks including Cleveland-based KeyCorp, Pittsburgh-based PNC Financial Services Group Inc. and Huntington Bancshares Inc. of Columbus, Ohio. Bank of Montreal also trails the 26 percent advance of the KBW Bank Index (BKX) of 24 U.S. lenders.

Cheap Stock

Bank of Montreal has been the cheapest of Canada’s six-biggest banks since August 2010 based on price to tangible book value per share and has the lowest return on tangible equity of the group in that period, according to data compiled by Bloomberg.

Price to tangible book value measures what investors are willing to pay for a company’s equity after removing intangible items such as goodwill and brand names that would have little value if the company went out of business.

“The very fact that it’s cheap takes people’s attention towards the bank and it’s their time to show investors how well that U.S. acquisition is working out,” Nakamoto said. “The stock price looks like it’s going to continue to move up -- it’s almost like it’s theirs to lose.”

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; David Scanlan at dscanlan@bloomberg.net; Christine Harper at charper@bloomberg.net

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