Bank of Montreal’s SWOT analysis: credit recovery, AI impact on stock

The Bank of Montreal (BMO), one of Canada’s largest financial institutions with a market capitalization of $76.21 billion, has been navigating a complex landscape of credit concerns, technological advancements, and global economic uncertainties. Recent analyses from various financial firms provide insights into BMO’s current position and future prospects, offering a comprehensive view of the challenges and opportunities facing the company. According to InvestingPro data, BMO currently appears undervalued based on its Fair Value analysis, suggesting potential upside for investors looking at the long term.

Credit Concerns and Recovery Outlook

BMO has recently grappled with credit issues stemming from larger loans originating in the 2021 vintage. These concerns have been a focal point for analysts, with expectations that the impaired Provision for Credit Losses (PCL) ratio will peak in the fourth quarter of 2024. InvestingPro analysis highlights that BMO is "quickly burning through cash," though the bank maintains its position as a prominent player in the banking industry with a 53-year track record of consistent dividend payments. Despite these challenges, there is optimism regarding the bank’s recovery trajectory. Analysts project a return to historical PCL averages by the end of 2025 or early 2026, signaling a potential turnaround in credit quality.

The anticipated improvement in credit metrics is expected to contribute to a rapid increase in Earnings Per Share (EPS) into 2026. Current EPS stands at $7.31, with analysts forecasting growth to $8.15 in fiscal 2025. This projection assumes the implementation of share buybacks, which could further enhance shareholder value. The bank currently trades at an attractive P/E ratio of 13.5x relative to its near-term earnings growth potential, as noted by InvestingPro. However, some analysts maintain a cautious stance, expressing concerns about the bank’s ability to effectively control costs. The potential for lower PCLs and growth in Pre-Provision Profit Throughput (PPPT) could play a crucial role in restoring BMO’s Return on Equity (ROE) to more favorable levels.

Global Industrial Economy and Tariff Impact

The broader economic context in which BMO operates is characterized by ongoing uncertainty surrounding tariffs and their impact on the global industrial economy. Analysts from BMO Global Commodities Research suggest that the prolonged ambiguity regarding tariff policies has already inflicted significant damage on commodity demand and output. This situation could potentially lead to a destocking cycle in the second quarter of 2025, presenting both challenges and opportunities for financial institutions like BMO.

Despite these headwinds, there are signs of resilience in certain sectors. U.S. industrial production showed a recovery in December 2024, with growth exceeding expectations due to increases in aircraft output, mining, and utilities. Additionally, U.S. housing starts surged in the same month, marking the largest jump since March 2021. These positive indicators suggest underlying strength in key economic areas, which could benefit BMO’s lending and investment banking activities.

Chinese Economic Landscape

China’s economic performance remains a critical factor in the global financial landscape. Recent analyses indicate mixed signals in the Chinese economy following the Lunar New Year. While some economic metrics have underperformed, others show signs of expansion. The construction and property sectors continue to exhibit weakness, but there are indications of stabilizing property prices, which could potentially support domestic consumption.

Of particular note is the strength observed in China’s automotive and battery sectors. Significant year-over-year growth in automotive and New Energy Vehicle (NEV) sales, coupled with robust battery production, presents opportunities for financial institutions with exposure to these industries. However, challenges persist in the export sector, with low growth attributed to new U.S. tariffs and the anticipated removal of de minimis exemptions.

Auto Insurance Industry Trends

The auto insurance industry, an important segment for many financial institutions, is facing its own set of challenges and opportunities. Insurers are grappling with the need to balance litigation concerns with plaintiffs’ attorneys while maintaining high customer satisfaction. The increasing adoption of Advanced Driver-Assistance Systems (ADAS) in vehicles presents a dual impact: potentially reducing low-impact crash frequency while simultaneously leading to higher repair costs due to technician shortages and the complexity of repairing electric vehicles and newer models.

Artificial Intelligence (AI) is emerging as a transformative force in the insurance sector. Analysts anticipate that AI will contribute to lower loss adjustment expense ratios by enhancing claims analytics, customer service, underwriting processes, and data structuring. This technological shift could create opportunities for financial institutions like BMO to innovate and improve efficiency in their insurance operations.

AI and Technology Advancements

The rapid advancement of AI technology is not limited to the insurance sector. The emergence of efficient AI competitors, such as the Chinese startup Deepseek, poses potential challenges to Western tech firms. This development could have far-reaching implications for billions of dollars in datacenter capital expenditures, affecting both the technology sector and the financial institutions that serve it.

For BMO, the AI revolution presents both opportunities and threats. On one hand, the bank could leverage AI to enhance its own operations, improve customer service, and develop new financial products. On the other hand, the disruption caused by AI in various industries could impact BMO’s client base and the broader economic landscape in which it operates.

Bear Case

How might ongoing credit concerns impact BMO’s performance?

The recent identification of larger loans from the 2021 vintage that led to credit issues in 2024 raises concerns about BMO’s risk management practices and loan portfolio quality. If these credit concerns persist or worsen, they could negatively impact the bank’s financial performance in several ways. First, higher provisions for credit losses would directly affect the bank’s profitability, potentially leading to lower earnings and reduced shareholder returns. Second, ongoing credit issues could damage BMO’s reputation, making it more challenging to attract new customers and retain existing ones. This could result in slower growth in deposits and loans, further impacting revenue. Additionally, regulatory scrutiny might increase, potentially leading to higher compliance costs and restrictions on certain business activities. If the expected recovery in credit quality does not materialize as quickly as anticipated, it could delay the projected rapid increase in EPS into 2026, disappointing investors and potentially leading to a lower stock valuation.

What risks does tariff uncertainty pose to the global industrial economy?

The prolonged uncertainty surrounding tariffs presents significant risks to the global industrial economy, which could indirectly affect BMO’s performance. Analysts suggest that this uncertainty has already caused substantial damage to commodity demand and output. If this trend continues, it could lead to a destocking cycle in Q2 2025, potentially triggering a broader economic slowdown. For BMO, this could translate into reduced demand for loans from industrial clients, lower transaction volumes in its investment banking division, and increased credit risk in its industrial loan portfolio. Furthermore, tariff-induced inflation concerns, combined with other factors such as deportations and a large federal deficit, may slow down the rate cut cycle. This could result in higher borrowing costs for BMO and its clients, potentially dampening economic activity and loan demand. The bank might also face challenges in its international operations, particularly in markets affected by changing trade dynamics. If global trade tensions escalate, it could lead to market volatility and reduced cross-border financial activities, areas where BMO has significant exposure.

Bull Case

How could the expected recovery in BMO’s credit quality benefit the company?

The anticipated improvement in BMO’s credit quality presents several potential benefits for the company. As analysts expect the impaired Provision for Credit Losses (PCL) ratio to peak in Q4/24 and return to historical averages by the end of 2025 or early 2026, this could lead to a significant reduction in loan loss provisions. Lower provisions would directly boost the bank’s profitability, potentially driving the rapid increase in Earnings Per Share (EPS) projected for 2026. Improved credit quality could also enhance BMO’s risk profile, potentially leading to lower funding costs and better terms from creditors and counterparties. This could provide the bank with more flexibility in its operations and capital allocation decisions, including the ability to increase dividends or pursue strategic acquisitions. Furthermore, a stronger credit position could bolster investor confidence, potentially leading to a higher stock valuation and improved access to capital markets. From a regulatory perspective, better credit quality might result in more favorable treatment from regulators, possibly allowing for increased operational flexibility and reduced compliance costs. Lastly, as credit concerns subside, management could shift its focus from risk mitigation to growth initiatives, potentially accelerating BMO’s expansion in key markets and business segments.

What opportunities does AI present for BMO in various sectors?

Artificial Intelligence (AI) presents numerous opportunities for BMO across various sectors of its operations. In the auto insurance industry, AI is expected to lower loss adjustment expense ratios by improving claims analytics, customer service, underwriting, and data structuring. BMO could leverage these advancements to enhance its insurance offerings, potentially gaining market share and improving profitability in this segment. In its core banking operations, AI could be used to streamline processes, reduce operational costs, and improve customer experiences. For example, AI-powered chatbots and virtual assistants could handle routine customer inquiries, freeing up human resources for more complex tasks. In risk management, AI algorithms could analyze vast amounts of data to identify potential credit risks more accurately and quickly, potentially reducing loan losses and improving overall portfolio quality. In investment banking and wealth management, AI could enhance market analysis, portfolio optimization, and personalized financial advice, potentially attracting more high-net-worth clients and increasing assets under management. Additionally, as AI transforms various industries, BMO could position itself as a key financial partner for AI-driven companies, potentially capturing new lending and advisory opportunities in this growing sector. By embracing AI technologies, BMO could differentiate itself from competitors, improve operational efficiency, and create new revenue streams, ultimately driving long-term growth and shareholder value.

SWOT Analysis

Strengths:

• Expected improvement in credit quality
• Potential for rapid EPS growth into 2026
• Strong position in automotive and battery sectors in China

Weaknesses:

• Recent credit issues from 2021 vintage loans
• Concerns about cost control effectiveness
• Exposure to tariff-sensitive industries

Opportunities:

• AI advancements in insurance and banking operations
• Growing automotive and NEV sales in China
• Potential for market share gains as credit quality improves

Threats:

• Ongoing tariff uncertainty impacting global industrial economy
• Litigation challenges in the auto insurance industry
• Competition from efficient AI startups in the tech sector
• Potential economic slowdown and destocking cycle

Analysts Targets

• RBC Capital Markets: $133.00 (December 6th, 2024)
• BMO Capital Markets: No specific target provided (May 14th, 2025)
• BMO Capital Markets: No specific target provided (March 24th, 2025)
• BMO Capital Markets: No specific target provided (January 29th, 2025)

This analysis is based on information available up to May 27, 2025.

InvestingPro: Smarter Decisions, Better Returns

Gain an edge in your investment decisions with InvestingPro’s in-depth analysis and exclusive insights on BMO. Our Pro platform offers fair value estimates, performance predictions, and risk assessments, along with additional tips and expert analysis. Explore BMO’s full potential at InvestingPro.

Should you invest in BMO right now? Consider this first:

Investing.com’s ProPicks, an AI-driven service trusted by over 130,000 paying members globally, provides easy-to-follow model portfolios designed for wealth accumulation. Curious if BMO is one of these AI-selected gems? Check out our ProPicks platform to find out and take your investment strategy to the next level.

To evaluate BMO further, use InvestingPro’s Fair Value tool for a comprehensive valuation based on various factors. You can also see if BMO appears on our undervalued or overvalued stock lists.

These tools provide a clearer picture of investment opportunities, enabling more informed decisions about where to allocate your funds.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.