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The Bank of Montreal at Roxton and Dundas in Toronto, Ont.

DELLA ROLLINS/The Globe and Mail

Bank of Montreal's decision to cut some mortgage rates to 2.99 per cent isn't just a marketing gimmick to amass market share – it's also a reaction to the dynamics of the bank's loan book.

When BMO released its quarterly results last week, loan growth for residential clients over the past year was rough once mortgages were stripped out. Consumer loans climbed 4 per cent from the first quarter of 2012, and credit card volumes actually fell 3 per cent.

Mortgages, though, jumped 13 per cent.

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If the bank's worried that this trend will continue, in large part because consumers are already maxed out on things like credit card debt, it makes sense that they would shoot for more mortgages. (Whether it's prudent policy is another discussion.)

The same is true for many of the other banks. At Canadian Imperial Bank of Commerce, total personal and card loans were virtually unchanged from 2012 to 2013, and Toronto-Dominion Bank's barely ticked higher. TD's mortgage book, however, grew 8 per cent.

For BMO, picking up some market share at the same time as it offsets slower growth in other areas would be a nice bonus. However, analyst John Aiken at Barclays Capital notes that following the 2012 mortgage wars, when all the banks lowered their rates after BMO lowered its own to 2.99 per cent, market shares barely changed. BMO's did climb the most, but the jump was just 31 basis points, followed by National Bank of Canada and Toronto-Dominion Bank in the 20 to 30 basis points range.

The only real game changer for market shares came from Bank of Nova Scotia's acquisition of ING Bank Canada, which sent its market share soaring 3.4 per cent, vaulting it into second place among the banks and proving why the banks scramble to get their hands on Canadian assets when they hit the market.

Yet even if BMO doesn't gain much market share, the second bout of 2.99 per cent rates could at the very least help it to amass more mortgages, an area where BMO's always lagged its big peers. Of the banks that already reported this quarter, BMO's $75-billion mortgage book pales in comparison to $144-billion at CIBC, $155 at TD and $175-billion at RBC.

That line of reasoning makes even more sense when you consider that analysts aren't expecting BMO to make much money off the mortgages because net interest margins, or the amount it makes from lending for more than it borrows, is falling.

"BMO has maintained that the margin on this product is still attractive to them and it has not significantly hurt their overall margin performance following last year's promotion," noted Jason Bilodeau at TD Securities. "It is impossible for us to independently verify based on the disclosure, but we continue to note margin pressure across the group and that it has been particularly pronounced at BMO and that the spreads versus 5 year funding rates appears slim."

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He also offered an ominous outlook. "As we continue to see ongoing softening of the Canadian housing market… this could shape up to be one of the more competitive seasons we have seen in some time, so this may just be the beginning" of rate battles.

(Tim Kiladze is a Globe and Mail Capital Markets Reporter.)

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