BMO betting on 2014 turnaround for weak U.S. retail arm

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Nearly three years on from its blockbuster acquisition, Bank of Montreal believes it can finally juice some growth out of its anemic U.S. arm.

Since buying Midwest-based Marshall & Ilsley Corp. for $4.1-billion in 2011, BMO has struggled to drum up momentum in U.S. personal and commercial banking. For the most part, investors were willing to give the bank some leeway, understanding that a major acquisition involves growing pains, but signs of panic emerged last quarter when BMO's U.S. P&C profit drop precipitously.

Initially, the bank chalked it up to higher loan-loss provisions from a few bad accounts, but investors grew squeamish. The future seemed too uncertain, revenues were shrinking and rival U.S. banks exhibited stronger loan growth.

A month after the earnings release, chief executive officer Bill Downe, the man behind the M&I deal, finally offered some real talk on the U.S. outlook at a major bank conference in Toronto.

Rather than dodge questions about any U.S. weakness, Mr. Downe took them head on, laying out a clear explanation as to why the expansion has been difficult.

One of BMO's chief areas for U.S. growth is small-business lending, and the bank just hasn't been able to stir the pot. Some of that stems from a weak Midwest economy, particularly in Illinois, meaning small businesses just aren't borrowing as much as they used to. But BMO's back office systems also weren't in order, and that meant the bank couldn't really promote this form of lending.

Mr. Downe also acknowledged that BMO missed the big mortgage refinancing boom in the U.S. as the housing market picked up and bond yields remained low.

But he swears there's a silver lining. "In some ways the delay in the recovery in the Midwest market worked in our favour, because we had a lot of work to do and I would have hated to miss the uptick while we were getting those system alignments done," he said.

Starting this year, BMO is much more optimistic because the Midwest economy is showing signs of life, which should spur small-business borrowing. Growth in that sector will boost the bank's deposits, which can then be used to backstop its retail products, such as mortgages and credit cards.

There's also reason to believe retail consumers will become safer clients to lend to, because credit scores and retail debt servicing ratios are improving in the Midwest.

Maybe even more crucially, BMO believes it can leverage its Canadian expertise south of the border. "Without question, retail banking in the U.S. can benefit from the application of many of the things that we've been doing in Canada; the application of that mindset," he said. The two markets now share a common back office platform that will make implementing these practices much easier.

Still, even Mr. Downe stresses that any turnaround likely won't be quick. While he is counting on this being the "inflection year," he made it clear that BMO is betting on incremental growth, not a monumental transformation.