BMO seeks bigger piece of key U.S. markets

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Bank of Montreal is laying the groundwork for more expansion in the United States, signalling to investors that it may buy more lenders south of the border and build additional branches to feed its massive North American growth spurt.

As profit growth in Canadian banking begins to slow down, BMO executives told a conference of investment analysts in Chicago that the bank wants to get bigger in several key U.S. markets, and will likely require more acquisitions to gain the heft it seeks.

BMO spent $4.1-billion to buy Midwestern U.S. lender Marshall & Ilsley Corp. last summer, making it the largest transaction in the bank's 195-year history. With those assets now integrated into BMO's operations, the bank is targeting states where it has a sizable foothold, and intends to take on giants of the U.S. financial services sector including U.S. Bancorp and JPMorgan Chase & Co.

"In Minneapolis, St. Louis and Kansas City, we need further acquisitions really," said Mark Furlong, president of BMO Harris Bank.

The acquisitions would augment branch construction in several cities, "to make those markets as efficient as we know we can."

The bank is now third in the U.S. Midwest behind those two financial institutions and figures it can vault itself into the top five in most of its American markets through strategic acquisitions and branch construction. "We'll achieve growth organically as well as through fill-in acquisitions," Mr. Furlong said.

BMO's strategy mirrors the U.S. expansion of Toronto Dominion Bank, which has acquired large lenders along the East Coast over the past decade to give it a beachhead in New York, Boston and Miami, then worked to acquire smaller lenders and construct branches to build up its network into a major regional player.

Much as TD has, BMO turned to the U.S. in search of growth as competition for profits in the Canadian market continues to grind away at margins for the country's biggest lenders.

BMO now has roughly 650 branches in the U.S. to go with about 900 locations in Canada. It has more locations in Milwaukee than in Montreal, and more branches in Chicago than Toronto.

But the bank has targeted certain markets to grow, including Chicago, Indianapolis, Minneapolis, St. Louis and Kansas City. In some of those markets, unemployment rates are below the U.S. national average and the economic recovery is taking hold, the bank said. To put itself into the top five in such markets, it may require the bank to acquire or build at least 70 to 100 branches, possibly more.

That could see BMO, Canada's fifth-largest bank, go hunting for small banks to buy in those markets to take on bigger players, which also include Wells Fargo. Though Mr. Furlong gave no names of ideal targets, the region includes several independent lenders such as Huntington Bancshares in Indianapolis, TCF Financial Corp. in Minneapolis and Valley View Bancshares in Kansas City that would be attractive if they ever went on the block. However, BMO executives said it was unlikely they would seek a sale through the U.S.-government-assisted liquidations of struggling banks that have taken place in recent years. Most of the best assets have been picked over, the bank suggested.

Mr. Furlong said he is confident BMO could compete with the big banks in those markets. "We know the [U.S.] competitors very well because we see them in other markets," he said.

The expansion talk comes after BMO announced this week it was closing branches as part of its integration of the M&I assets into its BMO Harris Bank operations. It has closed about 43 branches, including 24 announced this week, which were nearby its other branches.

BMO's shares have been slumping for the past year as the bank works to integrate M&I. BMO has avoided boosting its dividend as a result of the capital allocated to the U.S. expansion strategy. Though earnings at the U.S. operations will be flat for the near-term, the bank expects costs savings from integrating M&I to be "at least" $400-million, which is $100-million better than originally forecast. BMO chief executive officer Bill Downe said the result has been "well beyond what we originally contemplated when we approached the acquisition."

However, the bank may also be divesting assets. BMO faces headwinds in Florida, where it has only 1.4 per cent share of deposits, compared to more than 23 per cent in Wisconsin, and more than 11 per cent in Chicago. Similar to the struggles Royal Bank of Canada faced in the southeastern U.S. when a lack of scale left it unable to attract depositors and build market share, BMO said it plans to "address the strategy" in Florida. RBC sold it's U.S. retail bank last year.

"Clearly we don't have the scale in Florida that we do elsewhere," Mr. Furlong said. "We will address the strategy in Florida over time. At this point, it's not a distraction and really does not have a material effect on our business one way or the other."