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Region: Canada
BMO Financial
- Sector: Financial Services
- Sub Sector: Consumer Finance and Banking
- Region: Canada
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Fundamental View
AS OF 30 Dec 2024BMO is geographically diversified within Canada & via its commercial banking business in the U.S. and is also well-diversified by revenue with contribution from fee income businesses.
Credit has performed worse than peers in 2024, but losses are likely to stabilize and gradually improve in 2025, based on underwriting and risk management changes in recent years as well as seasoning effects.
Business Description
AS OF 20 Dec 2024- BMO Financial Group is the fourth largest depository institution in Canada with C$1.41 tn in assets as of F4Q24 and a market capitalization of US$70 bn. Total deposits were C$982 bn at F4Q24.
- BMO operates 1,890 branches in Canada and the United States in 2024.
- As of YE23, BMO had 1,013 branches within the United States, mostly in the Midwest. BMO ranked 11th in deposit market share in the U.S. (SNL), with a top-2 share in Illinois.
Risk & Catalysts
AS OF 20 Dec 2024BMO has a strong core deposit base in Canada and in the U.S., which mitigates the potential for a liquidity event. BMO remains well-capitalized relative to requirements with a target CET1 ratio of 12.5% (13.6% at F4Q24).
BMO closed the acquisition of Bank of the West from BNP Paribas in February 2023, significantly expanding its footprint in the U.S. We don’t expect deal integration to have much impact on the credit profile.
We view real estate-related risk in Canada as manageable for BMO given low LTV of exposures in vulnerable markets and conservative underwriting. Commercial real estate accounts for ~10% of total loans, and office is quite manageable at ~1% of total.
Credit deterioration was worse than peers in 2024, leading to elevated provisions in 2H24; BMO has indicated the problem loans were mostly originated in 2021, and provisions should start to improve in 2025.
Key Metric
AS OF 20 Dec 2024| $ mn | FY20 | FY21 | FY22 | FY23 | LTM 4Q24 |
|---|---|---|---|---|---|
| Revenue | 17,461 | 20,509 | 26,727 | 21,694 | 24,095 |
| Net Income | 3,790 | 6,167 | 10,519 | 3,291 | 5,380 |
| ROAE | 0.94% | 0.92% | 0.92% | 0.92% | 0.92% |
| NIM | 1.58% | 1.53% | 1.53% | 1.53% | 1.53% |
| Net Charge-offs / Loans | 0.25% | 0.14% | 0.08% | 0.14% | 0.39% |
| Total Assets | 713,376 | 797,018 | 860,451 | 969,851 | 1,011,587 |
| Unsecured LT Funding | 51,916 | 51,915 | 64,886 | 63,418 | 66,700 |
| CET1 Ratio (Fully-Phased-In) | 11.9% | 13.7% | 16.7% | 12.5% | 13.6% |
CreditSight View Comment
AS OF 27 Feb 2025We maintain our Market perform for BMO, with our preference within the group remaining to trade up in quality to RBC and TD. Surprising deterioration in asset quality metrics was the story throughout the latter part of F2024, with provisions well above historical average levels. Management has attributed the weakness largely to large wholesale loans to new borrowers originated in 2021, but given the steady climb in reserve coverage as well as changes to risk management and underwriting in recent years, BMO is confident quarterly provision ratios should moderate across F2025 alongside further potential benefits from efficiency initatives. This appeared to be the case in F1Q25, with provisions lower QoQ though reserve build continued. Revenue growth was strong YoY across NII and fee income.
Recommendation Reviewed: February 27, 2025
Recommendation Changed: August 26, 2020
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Fundamental View
AS OF 30 Dec 2024TD’s credit profile is supported by its scale, profitability, and history of strong credit quality, particularly in its core domestic banking footprint. TD also sees significant revenue contributions from the growing capital markets business and wealth management. U.S. retail banking has scale and is an important part of the overall franchise, but profitability will remain challenged.
We expect TD to continue to manage capital levels conservatively given profitability and regulatory pressures stemming from BSA/AML issues.
Business Description
AS OF 18 Dec 2024- Toronto Dominion is the second largest depository institution in Canada with C$2,062 bn in assets as of F4Q24 and a market cap of US$93.3 bn as of December 16, 2024. The company has C$1,269 bn in total deposits.
- As of 2024, TD ranked 9th in terms of U.S. deposits with approximately US$290.1 bn in deposits and 1,137 branches (SNL). The U.S. footprint is focused on the Atlantic coast including Delaware, New Jersey, New York, Massachusetts, New Hampshire, Connecticut, Maine, Vermont, and Pennsylvania.
Risk & Catalysts
AS OF 18 Dec 2024Toronto Dominion has a strong, largely retail-driven deposit base in both Canada and the U.S., which should mitigate the potential for a liquidity event.
The remediation efforts related to the U.S. business represent a medium term headwind for TD’s overall earnings profile, but one we view as manageable given the strength of the Canadian and Wholesale banking parts of the franchise. We expect TD to maintain strong capital and liquidity positions throughout the remediation period.
With the CEO transition, TD is conducting a strategic review of its business priorities and capital allocation, and therefore suspended its medium-term profitability targets. Management expects to provide an update to the medium-term targets in 2H25.
We view real estate-related risk in Canada as manageable for TD given low LTV of exposures in vulnerable markets and conservative underwriting, as well as significantly lower interest rates in Canada compared to the start of 2024.
Key Metric
AS OF 18 Dec 2024| $ mn | FY20 | FY21 | FY22 | FY23 | LTM 4Q24 |
|---|---|---|---|---|---|
| Revenue | 30,311 | 31,801 | 35,848 | 33,866 | 37,163 |
| Net Income | 8,846 | 11,371 | 13,544 | 7,883 | 6,509 |
| ROAE | 1.30% | 0.79% | 0.79% | 0.79% | 0.79% |
| NIM | 1.72% | 1.56% | 1.69% | 1.75% | 1.73% |
| Net Charge-offs / Loans | 0.34% | 0.18% | 0.15% | 0.24% | 0.34% |
| Total Assets | 1,289,484 | 1,394,270 | 1,406,122 | 1,407,709 | 1,479,549 |
| Unsecured LT Funding | 55,061 | 67,073 | 88,875 | 90,998 | 87,128 |
| CET1 Ratio | 13.1% | 15.2% | 16.2% | 14.4% | 13.1% |
CreditSight View Comment
AS OF 03 Mar 2025We maintain our Outperform recommendation for Toronto Dominion. Historically TD has traded as one of the tightest names in the Canadian bank peer group. However, over the past several quarters TD has traded towards the middle of the pack among Canadian banks, closer to BMO and BNS than to RBC. We continue to believe the best value in the sector in current conditions involves trading up in quality to TD and RBC. With the direct financial impact of the BSA/AML settlement in the rearview mirror (but with further restructuring and compliance costs still pending in the next few years), we remain confident in credit fundamentals long-term. The capital raise from selling SCHW shares is positive and allows for investment in Canadian and Wholesale banking.
Recommendation Reviewed: March 03, 2025
Recommendation Changed: March 08, 2023
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