Bank of Montreal’s wager on U.S. banking is proving profitable amid rising commercial lending, three years after doubling down on the Midwest with its biggest acquisition in the Canadian company’s 196-year history.
The Toronto-based lender posted some of its best earnings this year since entering the country in 1984 with the purchase of Chicago-based Harris Bank, while beating regional rivals in loan growth. The bank’s U.S. franchise is being elevated as it reaps the benefits from its July 2011 takeover of Milwaukee-based lender Marshall & Ilsley Corp, the C$4.1 billion ($3.7 billion) deal that doubled U.S. deposits and branches at what’s now called BMO Harris Bank.
M&I is “turning out to be a good acquisition,” said Brian Klock, a Boston-based bank analyst with Keefe, Bruyette & Woods Inc. “The accretion and cost savings have come in at or above their expectations, they have the market share in Chicago that they want on the deposit side and it seems like they’re growing loans faster now.”
Bank of Montreal, which earned about 15% of its profit from U.S. banking this fiscal year, is making inroads in a nation where Canadian banks have had mixed results.
Royal Bank of Canada sold its money-losing North Carolina- based RBC Bank in 2012 after almost 11 years. Toronto-Dominion Bank, meanwhile, spent more than $25 billion on U.S. purchases in the past decade, building a network of TD Bank branches stretching from Maine to Florida and now gets more than a quarter of its profit from U.S. retail operations.
Bank of Montreal Chief Executive Officer William Downe said its U.S. operations are beginning to accelerate.
“You can see the earnings turning upward,” Downe, 62, said in an Aug. 26 interview to discuss fiscal third-quarter results. “We’ve had very strong balance-sheet growth, net interest margin has now stabilized and we’re expecting stronger GDP growth in the Midwest than what we’ve seen.”
Profit from U.S. personal-and-commercial banking rose 6.2% to C$171 million for the period ended July 31, the biggest year-over-year gain since the second quarter of 2013. Revenue rose for the first time in two years, and the bank posted positive operating leverage -- a measure of efficiency -- after four straight negative quarters.
“We’ve gone from rationalizing the business to now the business is growing again, and we expect the business to continue to grow,” Downe said.
Bank of Montreal shares jumped 19% this year to yesterday’s close, the best performance among Canada’s five- biggest banks and beating the 3.7% return of the 24- company KBW Bank Index of U.S. lenders. The stock hit a record high of C$85.03 on Sept. 3, a week after posting earnings that beat analysts’ estimates. Shares rose 0.2% to C$84.39 at 9:32 a.m. in Toronto.
“The strong performance of BMO’s Canadian personal-and- commercial segment has been the primary driver of the stock, but improving trends in the U.S. have also played a key role,” said Sumit Malhotra, a Scotia Capital analyst in Toronto. “There is a view that the U.S. economically is getting better and as a result the banks that have business there will benefit from it.”
The U.S. economy expanded at a 4.2% annualized pace in the second quarter following a first-quarter contraction of 2.1%, according to Commerce Department data. Growth rates in areas including Chicago, Cleveland and Minneapolis are described as “moderate” by the Fed’s Beige Book report.
“Credit quality and expenses have been well-managed by BMO since the M&I acquisition, and over the past year the U.S. operations have generated very strong levels of commercial loan growth,” said Malhotra, who rates Bank of Montreal shares the equivalent of a hold. “Recent signs of net interest margin stability for BMO in the U.S. have been a clear positive, as it gives the market hope that more of the benefit from the strong loan growth will reach the revenue line of the bank.”
Five years ago, Bank of Montreal’s U.S. retail lender wasn’t considered a competitor by the region’s banks and the name Harris Bank rarely came up when talking about competition in the region, said Terry McEvoy, a Sterne Agee & Leach Inc. analyst who’s covered Midwest banks since the 1990s. That’s changed, he said.
“I notice in my travels that the name just appears more, whether it’s a new ATM in a popular location or the signage or the brand,” said McEvoy, who’s based in Portland, Maine. “In the last 12 to 18 months you hear their name more out in the marketplace as being a competitor.”
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