After 15 months of crisis management, Darryl White is gearing up for a boom.
Bank of Montreal’s chief executive officer held two days of meetings in mid-June with his 10 top executives – an annual ritual conducted partly by video call this time. With pent up economic activity ready to break loose as vaccination rates rise and lockdown measures lift, the mood among the bank’s top brass coming out of that gathering was “more optimistic than people have been in their careers,” Mr. White says in an interview.
“We’ve never done this before,” he says, about the unusual economic path to a recovery from the pandemic. “We’ve never had the spring coiled so tightly.”
Barely a year ago, Mr. White and his executive team were huddled in a very different frame of mind, deferring payments on hundreds of thousands of loans worth tens of billions of dollars to help struggling clients stay solvent through the pandemic’s first wave. In a six-month span, BMO earmarked nearly $2.2-billion to cover possible losses on business loans and personal lending in case large numbers of those companies and households failed to recover.
Instead of swallowing large losses, however, BMO has made $3.3-billion in profit so far this fiscal year while its capital reserves have increased.
Mr. White now believes a roaring two-year rebound is beginning, with GDP growth estimated to be roughly 6 per cent in Canada and 7 per cent in the United States this year, followed by 4.5 per cent in both countries next year. Some of that is catching up on lost ground from the crisis. Meanwhile, hundreds of billions of dollars of extra deposits have built up on bank balance sheets, waiting for opportunities to be spent.
Consumers are itching to book holidays and dine out, companies are bringing new spending ideas to their boards, and the pipeline for potential mergers and acquisitions is bursting. “I mean, there’s just so much liquidity,” Mr. White says, adding: “I don’t know how you keep a lid on it, frankly.”
Parts of the recovery still look precarious. Credit card spending from consumers and demand from businesses for new loans have so far been slow to pick up, while profit margins from lending continue to be squeezed by low interest rates.
And there are growing concerns about a looming risk of high inflation when spending and borrowing return. Mr. White says inflation isn’t at worrisome levels yet – he predicts it could end this year at 3 per cent and repeat at the same rate next year. But as consumers notice cars and vacations and food getting more expensive, a cycle of rising prices could take hold. “I do think the risk is increasing,” he says.
By far the biggest risk still comes from the novel coronavirus itself, and the potential for a resurgence of infections or another unexpected setback to public health. The linchpin in the rebound is the expectation that vaccines can prevent fourth or fifth waves of COVID-19 cases in Canada, fending off variants of the virus such as the Delta variant first detected in India.
“Everything else hangs off of that,” Mr. White says. “It’s almost impossible for me to see – absent that risk manifesting itself – that it won’t be one of the most profound economic growth environments of our lifetimes.”
The CEO of Canada’s fourth-largest bank is laying out his bullish case on a patio outside the bank’s trading floor in downtown Toronto, which is still empty and being renovated as traders work remotely. The physical overhaul is only one small component of Mr. White’s strategy for the coming years, which he describes as a broad “rewiring” of the 204-year-old bank. He likens the institution to a historic house that has “great bones” but needs work behind the walls.
The upgrades he wants to make include expanding the bank’s clout across North America, digitizing its banking services to make them simpler and less costly for clients, and making progress on environmental and social priorities such as climate change and diversity and inclusion.
Mr. White took over as CEO in 2017. At 49, he is the youngest Big Five bank CEO and the latest to be appointed. His early years in the job included a cost-cutting drive that has helped improve the bank’s once-lagging efficiency metrics, and also allowed BMO to redirect money to priority areas. That has helped fund a push to digitize “just about everything we do,” he says.
Now the bank has even more capacity to spend on renovations than it expected. As Canada’s banking regulator maintains a temporary halt on dividend hikes and share buybacks, BMO has surplus capital piling up – its common equity Tier 1 (CET1) ratio, a key measure of a bank’s capacity to absorb losses, is a plush 13 per cent – and plenty of options for how to use it.
That has fuelled speculation that BMO could make an acquisition, either of a regional U.S. bank or a specialized book of business. But prices are rising and good deals are hard to come by in a frenzied environment for mergers. “I’ve told investors that if you see us do nothing, it won’t be because we haven’t had many conversations,” Mr. White says. For now, he adds, “what we’ve done is working.”
One of Mr. White’s top priorities has been to expand BMO’s clout across North America by extending the reach of its Chicago-based BMO Harris Bank subsidiary beyond its core markets in the Midwest. When he started as CEO, U.S. banking contributed a quarter of BMO’s profits. In the most recent quarter, it chipped in 40 per cent of adjusted earnings.
Over the past several years, the bank has pushed into Texas, Ohio, California, Georgia and more recently Colorado, opening offices and poaching teams of bankers with local expertise from rivals to “build the sales spine of the organization out,” Mr. White says. More than 50 per cent of BMO’s U.S. revenue now comes from outside the bank’s Midwestern base.
Mr. White says he sees no reason to rein in the bank’s U.S. growth, “as long as it’s good business.” But for BMO, that has been the rub.
Before the pandemic, the bank was piling on loans to businesses. It was increasing commercial lending in Canada and the U.S. by 13 per cent to 16 per cent annually, much faster than most peers. After the pandemic forced many businesses to close or curb their activity last year, that rate of growth made investors especially nervous.
“You were worried about whether some of this growth would come back to hurt them from a credit standpoint,” said Ebrahim Poonawala, an analyst at Bank of America Securities, who had an “underperform” rating on BMO’s stock at the time. “You saw that concern translate into how the stock traded in the first half of last year.”
The bank’s share price fell from $100 to $62 in a matter of weeks and trailed other major Canadian banks in relative terms for much of last year. In response, BMO held a dedicated investor day focused on commercial lending and risk management last September to address investors’ fears. But Mr. White never curbed the bank’s ambition to lend more.
Now, through a combination of massive government stimulus, bank-led relief programs and – according to BMO – careful risk management, the bank’s loss rates on loans are near historic lows, and nearly all of the customers who deferred loans are making payments again. The rebound in the bank’s share price has outpaced most peers. It closed at $128.65 on Friday.
Mr. White “doesn’t lose his cool,” said Jeffrey Orr, CEO of Power Financial Corp., who has known the BMO CEO since Mr. White was a junior investment banker in the mid-1990s. “When the pressure gets higher and higher, he just bears down and never loses his presence.”
A level head will be necessary as economies reopen and banks and private lenders look to deploy piles of cash that sat idle during the crisis. “I think the competition for assets will only increase,” Mr. White says. But he argues that BMO has an advantage: The bank claims to be the sole or lead lender in 90 per cent of its relationships with commercial clients. “You have that conversation with the client. You know where the pricing tension is,” he says. “And if you’re doing it well, they trust you, they pay you for it.”
The extent to which Canada’s banks have come through the crisis unscathed is a sign of the resilience the financial sector has built since the previous financial crisis. But policy makers are also starting to take note of banks’ high profits and low losses on loans, and as government-backed relief programs wind down, there may be mounting pressure on banks to do more to relieve financial pressure on businesses and households that are still struggling.
“For sure, that’s a reasonable conversation,” Mr. White says, though he doesn’t see any immediate need to extend further relief to customers. “We take our social license bloody seriously.”
Where there is greater urgency is on environmental, social and governance (ESG) issues, which investors have moved to the front burner. “It’s omnipresent,” Mr. White says. “I don’t have a day go by that I don’t work on something [ESG-related].”
The top item on the bank’s list of ESG priorities is climate change and the transition to a net-zero world, which presents a generational challenge. At 49, Mr. White “certainly exemplifies a new generation of leader who’s focused on all those things,” said Blake Hutcheson, CEO of OMERS pension plan, who has worked with Mr. White as a BMO client and a fellow director on boards. “He’s high-energy. ... I like his odds.”
To help chart a transition, earlier this year the bank launched the BMO Climate Institute and created an energy transition group in its capital markets arm. In late 2019, it began offering sustainability-linked loans. But Mr. White sees BMO’s role as being a “lead adviser” to clients on climate issues, not “the regulator” of their activity. “It’s not for us to prescribe what alternative you choose, but we can give advice on the implications – for example, on their cost of capital of choice A versus choice B,” he says.
In the near term, the key issue for investors is still whether BMO can capitalize on the economic rebound Mr. White is predicting, then use the proceeds to deliver on its expansion plans while maintaining its improved efficiency.
Analysts like Mr. Poonawala have “come full circle,” and now rate BMO’s stock as a potential one to buy.
“The risk is if all this optimism around economic growth fails to materialize,” Mr. Poonawala said. “I think that could take a little bit of the excitement out of the stock.”
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