Bank of Montreal (TSX:BMO) recently reported fiscal fourth-quarter (Q4) 2024 results that came in weaker than expected, but the stock soared on the news.

Investors who missed the bounce are wondering if BMO stock is undervalued right now and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and total returns.

Bank of Montreal stock price

Bank of Montreal trades near $143 per share at the time of writing. The stock recently surged above $146 and is up about 9.5% in 2024.

The rally since September is largely due to interest rate cuts in the United States and Canada.

Bank of Montreal has a large American presence that dates back to its purchase of Harris Bank in the 1980s. Over time, Bank of Montreal has grown the U.S. business through strategic acquisitions, with the most recent being the US$16.5 billion purchase of California-based Bank of the West in early 2023.

The surge in interest rates in 2022 and 2023 put some commercial borrowers in a difficult situation. Households that have had to renew mortgages at much higher rates have also taken a hit. As a result, Bank of Montreal and its peers have increased provisions for credit losses (PCL) to cover potential defaults.

Bank of Montreal reported PCL of $1.52 billion for fiscal Q4 2024 compared to $446 million in the same period last year. For full-year fiscal 2024, BMO set aside $3.76 billion in PCL compared to $2.18 billion in fiscal 2023.

The Q4 PCL number is the largest among the Canadian banks. Bank of Montreal has some loans in the commercial banking segment of the American business that caused the PCL number to be higher than analysts had expected. Looking ahead, BMO expects PCL to moderate through 2025.

The interesting thing about the earnings results is that the stock initially plunged to below $127 on the news and then rallied to $146. The reason might be that investors believe PCL will decline in the coming quarters.

Another catalyst for the move higher might have been the 3% dividend increase and the news that BMO plans to buy back up to 20 million shares.

Risks

Rising unemployment in Canada could continue in 2025 and 2026 as the economy slows down. Interest rates are expected to continue to decline as the Bank of Canada tries to keep the economy from weakening too much, but lower rates might not be enough to offset the impact of job losses. Roughly one million Canadian homeowners face mortgage renewals in 2025 at rates that will be meaningfully higher than when the loans were initially taken in 2020. If defaults surge, the Canadian banks could be in for a rough ride.

South of the border, there is a risk that the central bank will decide to put rate cuts on hold or even raise rates again if inflation moves higher. This could occur if Donald Trump implements tariffs next year on all goods entering the country.

Should you buy Bank of Montreal now?

Investors can get a decent 4.4% dividend yield from BMO stock at the current price, so you get paid well to ride out the turbulence.

That being said, new investors might want to wait for a better entry point. The stock is already starting to give back some of the recent gains. Considering the size of the rally over the past three months and the uncertainty heading into 2025, a pullback wouldn't be a surprise in the near term.