While other big banks in Canada have avoided helping cannabis companies raise capital for fear of repercussion in the U.S., this bank has not.
It has already entered into three deals with cannabis companies and may underwrite more. In the meantime, the bank recently completed the acquisition of a New York-based brokerage service firm. It continues to benefit from rising interest rates and loan balances. The bank raised its dividend again this year and expects earnings to improve over the next fiscal year. It trades at a low 10 times its 2019 forecast earnings.
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BANK OF MONTREAL $98.30 (Toronto symbol BMO; Shares outstanding: 640.1 million; Market cap: $62.9 billion; www.bmo.com) is Canada’s fourth-largest bank, with assets of $765.3 billion.
Canadian retail banking operations supply 41% of the bank’s earnings, while its U.S. business contributes 22%. Bank of Montreal gets another 19% of its earnings from its capital markets operations, which sell brokerage and securities-trading services. The remaining 18% come from wealth management services.
Most of Canada’s big banks have avoided lending funds to companies in the cannabis industry. That’s mainly due to fears that those loans could hurt their U.S. operations, where cannabis is still a prohibited substance at the federal level.
However, Bank of Montreal recently helped Toronto-based Supreme Cannabis Company Inc. (TSX Venture Exchange symbol FIRE) sell $100 million of convertible debentures.
The bank has also helped underwrite two equity financing deals: $100 million for Cronos Group Inc. (Toronto symbol CRON); and $175 million for Canopy Growth Corp. (Toronto symbol WEED).
It’s likely that Bank of Montreal will participate in more underwriting deals as cannabis growers and retailers expand their operations in the next few years.
Meantime, the bank continues to benefit from rising interest rates and loan balances. If you disregard one-time items, Bank of Montreal earned $1.57 billion, or $2.36 a share, in its fiscal 2018 third quarter, ended July 31, 2018. That’s up 13.9% from $1.37 billion, or $2.03 a share, a year earlier. Revenue improved 6.6%, to $5.82 billion from $5.46 billion.
Bank of Montreal also recently completed its acquisition of KGS-Alpha Capital Markets. Based in New York City, this privately held firm provides brokerage services to institutional investors such as pension plans. It specializes in mortgage and asset-backed securities.
The bank has yet to reveal how much it paid for that business. However, the new operations complement its existing brokerage business in the U.S. The purchase will also give the bank access to KGS-Alpha’s high-quality clientele.
Overall earnings will likely improve from $8.95 a share in fiscal 2018 to $9.59 for 2019. The stock trades at just 10.4 times the 2019 forecast. The bank last raised its quarterly dividend by 3.2% with the May 2018 payment. Investors now receive $0.96 a share instead of $0.93. The new annual rate of $3.84 yields 3.8%.
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