Downe Turns Bank of Montreal From Laggard to Top Bank

William Downe spent his first two years atop Bank of Montreal confronting trading losses, credit writedowns and an underperforming stock. The third year proved different.

Bank of Montreal is the best-performing Canadian bank stock this year and one of three to top analysts’ estimates after posting record second-quarter profit on May 26. The bank also offers the second-highest dividend yield among the nation’s six biggest banks, at 4.44 percent.

“The ship has been righted,” said Juliette John, portfolio manager at Bissett Investment Management in Calgary, which oversees about C$11 billion ($10.6 billion) including Bank of Montreal. “Bill Downe has set out with some goals and it appears as though they are being followed through.”

Downe, 58, started his first day as CEO in March 2007 by cutting 1,000 head-office jobs and shifting the bank’s emphasis to Canadian consumer banking, which now represents 52 percent of profit versus 41 percent three years ago. Downe guided the bank through the U.S. subprime mortgage market collapse, posting almost C$2 billion in writedowns -- less than a 10th of the C$23 billion taken by Canadian banks.

Downe has also bought banks in Wisconsin, the Canadian life insurance operations of American International Group Inc. and Citigroup Inc.’s North American Diners Club franchise to bolster revenue.

Top Gainer

The Toronto-based lender has gained 13 percent this year, compared with a 3.9 percent gain for the nine-member Standard & Poor’s/TSX Banks Index. Royal Bank of Canada, the largest lender, has fallen 2.9 percent. Bank of Montreal is also the top-performing stock among Canada’s six biggest banks over the past 12 months, with a gain of 43 percent including dividends. The stock fell 10 cents to C$63.05 at 4:10 p.m. in trading on the Toronto Stock Exchange.

“BMO seems to have really improved over the last year or so,” said David Cockfield, who oversees about C$300 million including Bank of Montreal shares at MacNicol & Associates Asset Management Inc. in Toronto. “The investment community is now giving BMO more attention and I certainly haven’t been a seller, even at these levels.”

The rally contrasts with Downe’s start as CEO, after 24 years of assignments for the bank in Houston, Chicago and Toronto. Bank of Montreal had eight straight quarters of profit declines in the first two years of his tenure, making Bank of Montreal the worst-performing stock among Canada’s publicly traded banks over that time.

Trading Losses

Two months after he took over the top spot, Downe disclosed that Bank of Montreal lost as much as C$450 million from trading natural-gas contracts. Those pretax losses later ballooned to C$853 million that year, becoming the biggest commodities trading loss for a Canadian bank.

The lender also posted C$1.93 billion in writedowns over two years on derivatives and other investments tied to the U.S. subprime mortgage-market collapse. Canada went through its first recession in 17 years in Downe’s second year on the job.

“When you look at Bill’s tenure as CEO, he stepped in at exactly the wrong time,” Barclays Capital analyst John Aiken said in an interview. “For the first 18 months he headed the organization, he was putting out fires.”

The bank hasn’t recorded any writedowns in the past year, according to company statements. Profit rose to a record C$745 million in the second quarter, and net income has risen in the past four quarters; revenue has climbed in each of the past five quarters. Six analysts now rate the bank “buy,” second only to Toronto-Dominion Bank among buy ratings for Canadian lenders, according to Bloomberg data.

U.S. Expansion

“BMO has gotten into a better risk-management mode, and there haven’t been any real surprises,” Cockfield said. “You kept waiting for something bad to happen because that was more or less the pattern of the past.”

The lack of writedowns and reduced provisions for loan losses has allowed Downe, whose compensation rose 25 percent to C$7.45 million last year excluding pensions, to resume U.S. expansion.

Downe told investors in March that he favored building from within, though he’d consider “small and medium-sized acquisitions over time” if they made sense.

Bank of Montreal bought assets of failed lender Amcore Bank in a Federal Deposit Insurance Corp.-assisted deal in April, adding 52 branches in Illinois and Wisconsin.

“We put in place a clear strategy to transform BMO, with a relentless focus on delivering an excellent customer experience,” Downe said in an e-mailed response. “The contribution of personal and commercial banking to our earnings mix has been growing as a consequence.”

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