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Pedestrians walk past BMO office building in Toronto's financial district.

Chris Donovan/Globe and Mail

Bank of Montreal’s personal and commercial banking profits surged in the United States over the past fiscal year, but the uncertainty of a repeat performance is clouding the lender’s outlook.

Similar to rivals Toronto-Dominion Bank and Canadian Imperial Bank of Commerce, BMO operates a sizable bank in the United States that focuses on traditional lending. After years of underwhelming earnings, the Chicago-based unit saw profits jump 35 per cent, to $1.4-billion, in the fiscal year that ended Oct. 31.

On the back of this performance, BMO is making U.S. banking a crucial element of the growth story it is telling investors. “The U.S. segment remains a priority where we’ll continue to grow earnings at a faster pace than the overall bank," chief executive Darryl White said on a conference call Tuesday after reporting a fourth-quarter profit of $1.7-billion.

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For the full year, the bank earned $5.45-billion, with the U.S. division contributing 26 per cent of that.

The trouble, however, is that the competitive landscape in the United States is changing. Both TD and CIBC noted last week that a battle for loans and deposits is escalating – and it is likely to dent lending margins. BMO’s U.S. head, David Casper, said on a conference call that there is likely to be “modest downward pressure” on lending margins because of such competition.

The current dynamic has changed the outlook in that market. Because the economic recovery from the 2008 financial crisis was painstakingly slow, there was hope across the industry that rising rates would eventually boost bottom lines. While such gains have materialized of late, with lending margins rising, banks are starting to pay more for the deposits that fund their loans. “We expect to pass along higher rates to our customers,” Mr. Casper said of the coming year.

There are also signs in the bond market that the near-decade of U.S. economic expansion could finally be coming to an end – or is at least cooling. The change in expectations hit bank stocks Tuesday, with shares of the four largest U.S. banks dropping an average of 4.7 per cent. BMO shares fell 3.8 per cent.

While BMO’s U.S. P&C bank is only one division of four, its outlook is important because earnings from the Canadian equivalent barely rose in fiscal 2018 and BMO’s capital markets profit has been relatively flat for two straight years.

Wealth management has been a bright spot, with profit from traditional wealth – excluding insurance – climbing 10 per cent in fiscal 2018, but a recent bout of market volatility has dimmed near-term earnings growth, division head Joanna Rotenberg said on the conference call.

“Although we continue to rate BMO favourably over the longer term, several guidance items point to a softer start to fiscal 2019,” National Bank Financial analyst Gabriel Dechaine wrote in a research report, citing U.S. lending margins and wealth-management profits among his reasons.

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Despite the short-term uncertainty, commercial lending has continued to be a bright spot for BMO. The bank’s roots in business lending have paid dividends because loan growth in that market is booming. In Canada, total personal and commercial loans climbed 4 per cent in fiscal 2018, but commercial loans jumped 12 per cent; in the United States, commercial loans rose 10 per cent and commercial deposits spiked 16 per cent.

“We had double-digit loan growth in both Canada and in the United States, as well as good deposit growth,” Mr. White said of BMO’s commercial division on the conference call, adding that the growth “is well diversified across sectors and geographies consistent with our approach to building our business within our risk appetite.”

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