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BMO Doubles U.S. Earnings on Wisconsin Bet

Bank of Montreal has spent 28 years trying to make inroads in the U.S. Midwest. The efforts of Canada’s fourth-largest lender are starting to pay off, thanks to its C$4.1 billion ($3.98 billion) takeover of Marshall & Ilsley Corp. in Wisconsin.

Bank of Montreal (BMO)’s 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 Toronto. Chief Executive Officer William Downe, who kicked off presentations on the bank’s U.S. strategy to investors today, has said M&I will help the bank reach its target of C$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 in a telephone interview. “The U.S. is a very important component of their future growth.”

Bank of Montreal has already doubled its U.S. earnings since completing the M&I takeover in 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.

Bank of Montreal 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.

Worst Performer

The bank is the second worst-performing stock among Canada’s six-biggest banks over the past 12 months, sliding 7.8 percent. Toronto-Dominion is the best performer, with a 0.5 percent decline. Bank of Montreal rose 30 cents to close at C$55.02 in Toronto.

“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 C$4 billion in Toronto. “When you’re not No. 1 or No. 2 in Canada, in terms of domestic banking, you have to grow somewhere.”

Bank of Montreal entered the U.S. in 1984 with its C$718 million takeover of Harris Bank and spent a quarter century building on its Midwest network with 18 deals valued at about C$2.7 billion.

In comparison, Toronto-Dominion Bank (TD) 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.

Growth Strategy

BMO Harris Bank CEO Mark Furlong today identified five U.S. markets -- downtown Chicago, Indianapolis, Minneapolis, St. Louis and Kansas City, Missouri -- where it aims to add new branches or make small acquisitions.

The bank will maintain its branches in Phoenix, Arizona and in Florida, and may close or consolidate branches in Milwaukee and Madison, Wisconsin, and in suburban Chicago, Furlong said in an investor presentation. The bank said yesterday it will close 24 U.S. branches, primarily due to an overlap in its network.

The bank said in a slideshow presentation that it expects cost savings of “at least” $400 million from its M&I integration, up from an earlier target of $300 million. Expenses are down $180 million on an annualized basis, the bank said.

The U.S. gives Bank of Montreal a chance to distinguish itself from its peers, say analysts and investors including Bissett Investment Management’s Juliette John. Royal Bank of Canada (RY), 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.

‘Solid Strategies’

“The banks that do have the solid strategies outside of Canada are a bit better positioned,” said John, who helps manage C$13.8 billion including Bank of Montreal 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.”

Bank of Montreal’s 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.”

Cheapest Stock

Bank of Montreal is Canada’s cheapest bank stock, trading at about 9.1 times per-share earnings. In comparison, Royal Bank and Bank of Nova Scotia (BNS) have a per-share ratio of about 11.5, and Toronto-Dominion has a ratio of 10.9. Canadian Imperial Bank of Commerce is 9.3.

“The Canadian market for banking is likely to slow, personal loan growth is likely to be slower in Canada and they are maybe not as strong in commercial as they were in the past,” John said.

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.

Bank of Montreal 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 Bank of Montreal 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.

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; David Scanlan at dscanlan@bloomberg.net

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