Is Bank of Montreal (TSX:BMO) Still a Buy After Its 35% Rally?

The recent 35% rally in Bank of Montreal (TSX:BMO) has sparked debate among investors about whether the stock remains a compelling buy. To assess this, we must dissect the valuation dissonance between BMO's current metrics and industry benchmarks, while evaluating its future earnings potential.

Valuation Dissonance: A Premium Amid Mixed Signals

BMO's Price-to-Earnings (P/E) ratio of 15.3x as of 2025 stands out as a premium to the broader banking industry average of 10.6x and slightly above its peer group average of 14.8x. This suggests the market is pricing in stronger earnings growth or superior risk-adjusted returns compared to its peers. However, this premium must be contextualized. For instance, RBC, a key Canadian peer, commands a P/E of 11.5x, indicating BMO's valuation is not only industry-leading but also divergent from its closest competitors.

The Price-to-Book (P/B) ratio further highlights this dissonance. BMO's P/B of 1.49 as of December 2025 exceeds the industry median of 0.98 for banks according to Gurufocus, placing it in the top 20% of the sector in terms of valuation. While this could signal confidence in BMO's capital efficiency and growth prospects, it also raises questions about sustainability. The banking sector's overall P/B of 1.13 for regional banks and 1.32 for money center banks according to NYU Stern data underscores that BMO's valuation is trading at a significant premium to its peers, particularly when compared to RBC's lower P/B.

Return on Equity (ROE) provides a counterbalance to these valuation concerns. BMO's ROE of 12.0% in Q3 2025 outperforms the industry average of 11.09% according to CSIMarket, reflecting disciplined capital allocation and operating leverage. This metric, combined with a robust Common Equity Tier 1 (CET1) ratio of 13.5% according to Tikr, supports its ability to sustain aggressive shareholder returns. However, the ROE is projected to remain around 12.20% in 2026 according to SimplyWall, which, while solid, lags behind the UAE banking sector's 19.6% ROE according to Alvarez & Marsal, hinting at regional competitive pressures.

Future Earnings Potential: Growth or Stagnation?

Analyst forecasts paint a cautiously optimistic picture. BMO's 2025 earnings are projected to reach $6.02 billion, with a 14% year-over-year growth expected in 2026 according to Wall Street Zen. This growth is underpinned by a 4% share buyback plan and improved operating leverage according to Public. However, challenges persist. BMO's net interest margin (NIM) for personal and commercial banking stagnated at 3.90% quarter-over-quarter, and while provisions for credit losses ($797 million) were below expectations, this could mask underlying credit risks in a tightening economic environment.

The one-year price target average of $132.17/share according to Nasdaq implies minimal upside from its current price of $132.07/share, with a "Hold" consensus rating from analysts according to Public. This suggests that while BMO's fundamentals are sound, the market may already be pricing in most of its near-term growth potential. For investors seeking outsized returns, this muted outlook could be a deterrent.

Conclusion: A Buy, But With Caution

BMO's valuation dissonance-evidenced by its premium P/E and P/B ratios-reflects a market that values its capital strength and operational efficiency. However, the stock's future earnings potential appears modest, with ROE and NIM growth constrained by macroeconomic headwinds. For long-term investors prioritizing stability and dividend income, BMO remains a solid holding, particularly given its CET1 ratio and shareholder return focus. Yet, for those seeking aggressive growth, the current valuation may lack the margin of safety to justify a "Buy" rating.

In essence, BMO is a "Hold" in the short term but retains appeal for investors who prioritize resilience over rapid capital appreciation.