Bank of Montreal named to “Best Stock Ideas” list at RBC

Out with one bank and in with another.

That’s what the RBC Global Financial Research Group did March 17 with its “Best Stock Ideas” list, dropping Canadian Imperial Bank of Commerce and adding Bank of Montreal (Bank of Montreal Stock Quote, Chart, News, Analysts, Financials TSX:BMO).

As reported by the Globe and Mail, RBC analyst Darko Mihelic March 18 reiterated his “Outperform” rating and 12-month price target of $163.00 on BMO. The analyst says the outlook is improving for BMO.

“Credit problems are mostly over and provisions for credit losses (PCLs) have peaked in the absence of tariffs: Without considering the impact of tariffs, we believe BMO is likely past its credit concerns as its impaired PCL ratio peaked in Q4/24 at 66 basis points and it identified loans in the 2021 vintage that resulted in elevated credit losses in 2024, setting the stage for moderating PCLs in 2025 and 2026,” he said. “We view 2025 as a transitional period with heightened uncertainty and assume an impaired PCL [provisions for credit losses] ratio of 0.54 per cent in 2025 versus 0.47 per cent in 2024 (above BMO’s guidance in the high-40s basis points, which is likely conservative in our view), which declines to a lower impaired PCL ratio of 0.43 per cent in 2026. On a P/B basis, BMO is trading at 1.27 times, below the peer average of 1.48 times and its long-term historical average of 1.49 times.

Mihelic says BMO is committed to rebuild its return on equity.

“BMO outlined the roadmap to its 15-per-cent-plus medium-term ROE target from 10 per cent in 2024: U.S. segment improvement (credit normalization and Bank of the West synergies and growth), normalized PCLs which move closer to its long-term average total PCL ratio in the mid-30s bps range, operating performance/positive operating leverage, and capital optimization (capital allocation and share buyback),” he added. “BMO is looking to rebuild its ROE to 15 per cent within 3 to 5 years, hoping to have this accomplished at the lower end of that time range. If BMO were to achieve its 15-per-cent ROE target at the earliest end of its targeted time frame (say 3 years, or by 2027), it would imply significant upside to core EPS ($15+ per share by 2027). For reference, a 15-per-cent ROE in 2025 would imply earnings power of approximately $16.13 per share versus $9.68 per share in 2024.”