Bank of Montreal targets Midwest, Indy for growth

Bank of Montreal has spent 28 years trying to make in-roads in the U.S. Midwest. The efforts of Canada’s fourth-largest lender are starting to pay off, thanks to its $4 billion takeover of Marshall & Ilsley Corp. in Wisconsin.

Bank of Montreal’s 2011 purchase of M&I, the largest acquisition in the company’s 195-year history, doubled its U.S. deposits and branches, and gave the Canadian lender more branches in Chicago than in its home city of Toronto. It plans to continue growing in the Midwest.

BMO has identified five U.S. markets—downtown Chicago, Indianapolis, Minneapolis, St. Louis and Kansas City—where it aims to add new branches or make acquisitions.

CEO William Downe, who will kick off presentations on the bank’s U.S. strategy to investors Tuesday, has said the M&I acquisition will help the bank reach its target of nearly $1 billion in annual profit from consumer banking and wealth management south of the border.

“Every bank is making their bet on where they want to grow, and the U.S. is the bet that Bank of Montreal has made,” Robert Sedran, a CIBC World Markets analyst, said. “The U.S. is a very important component of their future growth.”

BMO has already doubled its U.S. earnings since completing the M&I takeover last July, and consumer lending from its Chicago-based BMO Harris Bank accounted for about 12 percent of the bank’s profit for the first half of its fiscal year ending Oct. 31. That’s up from 7.5 percent in 2010, before the Wisconsin takeover.

BMO will try to persuade shareholders at an investors day in Chicago that its bet on the U.S. Midwest will pay off even as U.S. economic growth slows.

The bank is the second worst-performing stock among Canada’s six-biggest banks over the past 12 months as of Monday’s close, sliding 8.2 percent during that time frame. Toronto-Dominion is the best performer, with a 0.9-percent decline.

“Building up the U.S. business is key in order to differentiate themselves from the other Canadian banks,” said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier Inc., which manages about $3.9 billion in Toronto. “When you’re not No. 1 or No. 2 in Canada, in terms of domestic banking, you have to grow somewhere.”

BMO entered the U.S. in 1984 with its $700 million takeover of Harris Bank and spent a quarter century building on its Midwest network with 18 deals valued at about $2.6 billion.

In comparison, Toronto-Dominion Bank entered the U.S. consumer lending market in 2004 and has spent more than $25 billion building a franchise that spans from Maine to Florida. Canada’s second-largest lender now has more branches in the U.S. than in Canada, and posted record profit of $358 million from the unit in the second quarter.

BMO's integration of M&I is “on track”, Chief Financial Officer Tom Flynn said in a June 13 conference hosted by Morgan Stanley. The bank said Monday in a slideshow presentation that it expects cost savings of “at least” $400 million from its integration, up from an earlier target of $300 million. BMO said Monday it will close 24 U.S. branches, primarily due to an overlap in its network.

BMO Harris Bank is the third largest bank operating in the Indianapolis area, based on employment. It has about 580 local employees at 40 or so locations in the market.

The U.S. gives BMO a chance to distinguish itself from its peers, say analysts and investors including Bissett Investment Management’s Juliette John. Royal Bank of Canada, the country’s biggest lender, sold its U.S. consumer bank, while Bank of Nova Scotia has focused on Latin America and Asia for its international growth.

“The banks that do have the solid strategies outside of Canada are a bit better positioned,” said John, who helps manage $13.4 billion including BMO shares. “TD has done really well in developing scale in the U.S., their markets seem to be growing a little bit faster, and Scotia has growth opportunities outside of North America, and they’re showing some decent results as well.”

BMO investor day could help increase awareness of its U.S. operations, Nakamoto said.

“Bank of Montreal just doesn’t seem to resonate with investors,” he said. “There does seem to be a bit of a void on their image. People view TD very strongly as a retail bank in the U.S., but Bank of Montreal doesn’t seem to have that same cachet or image.”

BMO Harris Bank will be increasingly looked at as the “growth engine” for Bank of Montreal, even though Canadian banking remains the bank’s dominant business, Sedran said.

BMO had 672 bank branches in the U.S. as of April 30, according to financial statements. Almost 80 percent of deposits are in Illinois, where BMO ranks second in deposit share, and Wisconsin, where it ranks first, according to Sedran.

The outlook for Bank of Montreal’s U.S. consumer lending business hinges on its ability to integrate M&I and expand, followed by the performance of the Midwest and the outlook of the U.S. economy in general, according to Sedran.