Making A Break For The Border

Until recently, stodgy Harris Bankcorp Inc. seemed content to play the wallflower at the bank-consolidation party under way in Chicago. But now, Harris is barging onto the dance floor. In April, it announced it would acquire Suburban Bancorp Inc. for $246 million in stock, thereby becoming Chicago's third-largest retail banking franchise. Meanwhile, Harris is undercutting rivals on loan rates and running ads promising discounts on loans to small businesses.

Why all the activity? Since passage of the North American Free Trade Agreement, Harris' parent, Bank of Montreal, has been pursuing a bold plan to build "the first truly North American bank," according to Chief Executive Officer Matthew W. Barrett. Having cleaned up and improved the finances of the parent bank since becoming CEO in 1989, he aims to get Harris moving and prepare a major push for expansion. Barrett vows to grab 12% of the Chicago market by 2002--triple 1993 levels. Bank of Montreal is also beefing up corporate-banking activities in Mexico. Ultimately, Barrett wants his bank to earn at least half its net income outside Canada, up from roughly 25% now.

If it works, Barrett's strategy could transform Bank of Montreal, which is already North America's 10th largest, into one of the continent's dominant banks. His approach could cause other big banks to reconsider their strategies.

The NAFTA gambit has a lot of logic, as Barrett sees it. With companies from Wal-Mart Stores Inc. to Detroit's Big Three busy building continentwide franchises, it makes sense for a bank to follow its customers and build a franchise of its own. Barrett says the bank's broad reach will lure customers from North America, Europe, and Asia. Bank officials say that having a presence in the vibrant economy of the upper Midwest is particularly useful. And by owning a U.S. bank, BofM can offer more corporate-banking services than most other foreign banks--from lending to check processing.

In a way, Barrett had no choice but to head south if he wanted to grow. The fragmented U.S. market offers more opportunities for expansion than Canada, where the top six banks control more than 80% of the market.

OUT-OF-TOWNERS. Bank of Montreal still must prove it can successfully execute an ambitious expansion, however. Under Barrett's predecessors, BofM missed a golden opportunity to steal a march on Chicago by letting Harris languish for nearly a decade after acquiring it in 1984. Now, the Chicago market is far more competitive: First Chicago has cleaned up its act, BankAmerica has acquired Continental, and a host of out-of-town players have entered, including NBD Bancorp, Banc One, and the Netherlands' ABN-AMRO Holding, which owns La Salle National. "The time when Harris could [capitalize] on Bank of Montreal's global reach and credit rating is gone," scoffs Marcus W. Acheson IV, executive vice-president at Continental. Even Alan G. McNally, who took over as CEO at Harris last fall, concedes: "There was a huge potential that wasn't exploited with the same intensity as today." In Mexico, where BofM was a major lender in the early 1980s, the bank is now moving more cautiously than some U.S. banks.

Harris still lags behind many of its rivals. And competitors aren't eager to cede ground. "We're going to do whatever it takes to preserve and expand our niche," says David Rudis, executive vice-president at La Salle.

Bank of Montreal is trying to make up for its past lassitude. Harris' Suburban deal alone will give it 72 branches, putting it well on the way to its target of 120 branches and 1 million Chicago retail-banking customers. McNally, who built a strong reputation running Bank of Montreal's retail operations in Canada, plans to build as many as 27 additional branches. He is planning further acquisitions, backed by Barrett's pledge to spend $700 million. Bank of Montreal also plans to use Harris to expand its corporate-banking business. In addition, Bank of Montreal is drawing on the skills of its Canadian investment-banking subsidiary to venture into U.S. invest- ment banking. McNally believes that the thousands of corporate customers with big cross-border businesses will welcome a bank with a strong presence in both the U.S. and Canada.

"DEADLIEST BUSINESS." So far, so good. Consider Schneider National Corp., a privately held trucker in Green Bay, Wis. Schneider first borrowed from Harris two years ago. Harris then took Schneider to Bank of Montreal for cash-management services in Canada, where Bank of Montreal systems mirror the ones Harris uses in the U.S. Bank of Montreal has now assigned an account manager to handle the personal accounts of Schneider employees in Canada. "This streamlines our operations and saves a lot of time," says Steven L. Crear, assistant treasurer. "We don't have the time to invest in a complex set of different banking relationships." Similarly, Robert Tubbesing, chief financial officer of Premdor Inc., a Toronto-based doormaker with big U.S. operations, says his company is sticking with BofM despite having been wooed by other banks because the others lack a major U.S. presence.

In Mexico, Bank of Montreal's aims are narrower. Unlike some big U.S. banks, it has no plans to open a subsidiary in Mexico. But with Mexico's economic-reform program under way, "we see it as a high-growth area for the bank," says Barrett. He plans to expand corporate and investment banking there, including treasury services and trading. Bank of Montreal is already expanding credit lines to companies to finance trade transactions between Canada, the U.S., and Mexico.

If anyone should know the bank's strengths and weaknesses, it's Barrett. He started his Bank of Montreal career in London, as a teenage clerk fresh out of school. At the time, he wanted to be a writer and says that banking "looked like the deadliest business in the world." But after he was transferred to Canada, he fell in love with the relationship nature of the banking industry--and with a fellow employee, Irene Korsak, who became his wife. Although he never went to college, Barrett's problem-solving abilities put him on the fast track by age 35. He was 45 when he became CEO in 1989.

When Barrett took over, Canada's oldest bank had been drifting for years. Its costs were among the highest in the industry, while market share and morale were down. Barrett immediately set off on a barnstorming tour of the bank's operations, during which he established a rapport with employees that was in marked contrast to his aloof predecessor. It worked brilliantly to boost morale, says one manager. His goal has been to rank among the top two Canadian banks in every key financial measure, and he's very nearly there. Barrett has slashed expenses and cut credit losses from a sky-high 2.2% of total loans in 1989 to 0.94% last year. The result: four straight years of rising profits, capped by last year's record $510 million.

Skeptics wonder if Barrett will succeed in his bid to create a North American bank. But he's convinced banking will eventually be consolidated along North American lines. As this happens, other Canadian banks will "face a stark choice," he predicts. They'll either have to adopt North American strategies of their own or "resign themselves to becoming, over time, essentially regional banks" that could end up being swallowed by one of the emerging U.S. giants. For Barrett, that isn't much of a choice.

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