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BMO’s U.S. expansion still a ‘show-me’ story

Bank of Montreal took analysts analysts to Chicago this week to highlight the bank's growth plans in the United States.

The centrepiece is how the bank is doing following the transformative purchase of Wisconsin-based Marshall & Ilsley – and the reaction from analysts who went is still that the deal still has the potential to be great but there's a lot of things left to prove.

BMO is now in the process of putting M&I together with its existing operations in the U.S., which run under the BMO Harris brand. The consensus is that M&I offers opportunity, but that the next few months of integration will be key.

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One analyst, Brad Smith of Stonecap Securities, notes that despite rosy numbers on the profit and cost-savings front, the bank may still struggle to meet its return targets. As a result, even though BMO got M&I at a low price, the transaction may not be a "big win" for BMO investors.

Here's a sampling of reaction from analysts.

From Peter Routledge, who covers BMO for National Bank Financial:

"We think the integration of the M&I and Harris platforms has a ways to go," he said in a note. "The most intense phase of the integration will occur in the fall of 2012 during which time BMO Harris will transfer the M&I branches to BMO's information technology systems ... operational risk will be high and missteps (if they occur) will, most likely, be widely publicized. This will be a headwind for the stock through the fall, all else equal."

He cautioned investors "not to lose sight of longer-term positives" which he said were strong positions in midwestern cities that give the bank "more realistic growth opportunities than it has ever had in the United States." The banks also has more traction now to growth wealth management, he said.

Robert Sedran, who covers BMO for CIBC World Markets:

He pointed to cost savings that are ahead of schedule, and a "major systems conversion later this calendar year should see a significant step-up in the pace of cost savings next year."

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"BMO Harris has a leading market position in the Midwest, and the economic fundamentals of that region provide solid growth opportunities (not only for its P&C business, but also for its wealth management and capital markets businesses).

John Aiken, Barclays Capital:

"Execution remains critical to the success of BMO's U.S. strategy. While we are incrementally more positive on its U.S. operations, we are maintaining our 2-Equal Weight rating as we, like the market, are taking a 'show me' stance before giving the bank credit for the success of its plan."

Brad Smith, Stonecap Securities:

The amount of capital employed in the business suggests that this is not a big win for shareholders of BMO, because the profit projections suggest a "targeted return on capital that is just north of 7 per cent, well below the bank's estimated cost of capital between 9 per cent – 10 per cent and requiring considerable enhancement to achieve management's stated objective of achieving a 15 per cent IRR on the M&I acquisition."

"Combined with what would appear to be a continuing stressed operating environment in U.S. P&C Banking, including sustained net interest margin pressure and lethargic loan growth prospects we are maintaining our Underperform rating."

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