Bank of Montreal (TSX:BMO) Earnings Soar As an Economic Recovery Unfolds

BMO stock continues to climb higher as the bank reports better-than-expected Q2 earnings and indicates a strong economic recovery ahead.

| More on:

Bank of Montreal (TSX:BMO)(NYSE:BMO) kicked off earnings season for the banks yesterday. In a nutshell, it was a pretty phenomenal report. Adjusted net income soared almost 80%. Return on equity rose nicely, and CEO Darryl White spoke of even better things to come going forward.

Canadian bank stocks soldier on to new heights

Bank stocks have really soared to new heights since the pandemic hit, which was unexpected. In contrast, we feared that sharply rising loan losses would hit the banking system hard. BMO stock, for example, has soared more than 30% in 2021 to new all-time highs.

BMO stock price

Today, Canadian banks are in the best shape yet. Not only have bank stock prices soared to all-time highs, but their financial strength is indisputable. Let’s take a look at what’s shaping up to be another strong earnings season for Canadian banks.

BMO stock: A solid earnings result takes it higher

Expectations for the Bank of Montreal’s earnings this quarter were high, albeit the bank easily beat them. Net income increased 77%, adjusted EPS doubled and loan loss provisions were stable. In fact, they were better than stable, as BMO reported a recovery on provisions of performing loans.

The loan loss situation today is therefore not as bad as the banks had feared. Canadians made it through the pandemic relatively well. Fiscal stimulus and government support made all the difference. In fact, not only did the consumer make it through, but many are even thriving. Deposits are up at BMO, reflecting highly liquid consumer balance sheets.

Bank of Montreal expects strong GDP growth in 2021

According to Bank of Montreal management, the economic recovery is set to accelerate this year and next. This is the result of “fiscal stimulus, pent-up demand, and elevated household savings.” So we are undoubtedly entering a period of strong growth. BMO is expecting a 6.5% growth rate in U.S. real gross domestic product (GDP) in 2021, which would be the strongest expansion in 37 years. In Canada, the expectation is for 6% GDP growth.

Is GDP growth already reflected in stock prices?

I’ve already touched on the fact that Canadian bank stocks like BMO stock are trading at all-time highs. This is a reflection not only of their strength but also of rampant optimism. After a year-and-half of fear, stress, and uncertainty, it’s little wonder. People want to feel optimistic. But are they bidding stock prices up too high?

I mean, let’s say that the banks will report phenomenal results in 2021. That’s great. But if the expectations that are priced into bank stocks are even more phenomenal, they will go down. The return on any given stock is a function of its valuation. If its valuation reflects an even better future than what the reality will be, the stock will falter.

Bank earnings season continues this week, with TD Bank and Royal Bank expected to report as well.

The bottom line

In summary, I think the key takeaway here is that Canadian banks are thriving. We have seen this in Bank of Montreal’s Q2 results. We’ll see more of it when the other Canadian banks report. The economic recovery is taking shape. Confidence is high and activity is rising. This has implications not only for banks but also for all economically sensitive companies.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas has no position in any of the stocks mentioned.

More on Bank Stocks

dividends can compound over time
Bank Stocks

Is TD Bank Stock a Buy for Its 5.2% Dividend Yield?

TD Bank stock offers a rare 5.2% dividend yield—can it rebound from challenges and reward contrarian investors? Here's what to…

Read more »

analyze data
Bank Stocks

Is BMO Stock a Buy for its 4.7% Dividend Yield?

Bank of Montreal is up 20% since late August. Are more gains on the way?

Read more »

calculate and analyze stock
Bank Stocks

4% Dividend Yield? I Keep Buying This Dividend Stock in Bulk!

If you find the perfect dividend stock, you never have to worry about investing again. And that's what you get…

Read more »

Investor reading the newspaper
Bank Stocks

Is Canadian Imperial Bank of Commerce Stock a Good Buy?

Let's dive into whether Canadian Imperial Bank of Commerce (TSX:CM) is a top buy, sell, or hold right now.

Read more »

Man data analyze
Bank Stocks

Where Will BNS Stock Be in 3 Years?

Bank of Nova Scotia is primed for growth with a bold U.S. expansion, steady dividends, and a value focus that…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Stocks for Beginners

TFSA 101: Earn $1,596.60 per Year Tax-Free!

Investors don't have to buy some risky stock if they want tax-free high income. Instead, buy this top stock instead.

Read more »

data analyze research
Bank Stocks

TD Bank: Buy, Hold, or Sell Now?

TD is underperforming its large Canadian peers this year. Is a rebound on the way?

Read more »

data analyze research
Bank Stocks

A Dividend Bank Stock I’d Buy Over TD Stock Right Now

TD stock has long been a strong dividend and growth provider. However, recent issues could cause investors to think twice.

Read more »