Why BMO says its U.S. retail lending woes have hit bottom

The Canadian banking giant BMO Financial has spent the past decade bulking up in the United States and has a solid track record of commercial banking growth to show for it.

However, BMO's retail loans have declined steadily in recent years. So it is significant that, after years of whittling down its consumer portfolio and severing ties with what it described as unprofitable customers, the company is finally predicting some meaningful growth.

“I’d be very surprised if we didn’t see some attractive growth in fiscal 2018 and beyond,” CEO Darryl White said at a forum for Canadian bank chiefs this week when asked about the company’s lagging U.S. retail business.

U.S. retail loans plunged 24% over the past two years at BMO to $17.7 billion as of Oct 31, while commercial loans gradually increased and drove a 26% gain in U.S. profits over the same period.

Should the Toronto company turn around its retail unit — which makes up about a quarter of its U.S. loan book — it would finally overcome its troubles tied to a crisis-era acquisition.

BMO made an aggressive move into the U.S. market in 2011, scooping up the struggling Marshall & Ilsley in Milwaukee, which had $45 billion in assets. The deal, valued at $4.1 billion, allowed BMO to nearly double its asset size south of the border, where it operated Harris Bank in Chicago.

Red flags in the retail business emerged shortly after the deal closed. Customer service began to slip as online glitches emerged during the integration. BMO also spent several years cleaning up problem assets, ditching unprofitable accounts and, like much of the industry, allowing home equity loans originated during the downturn to run off of its books, White said Tuesday during the conference.

But things are looking up, according to White. BMO expects to soon reap the benefits of its investments in marketing and sales training for branch employees. The company also recently acquired a $2 billion portfolio of U.S. jumbo mortgages — and hopes to benefit from the rosy outlook for economic growth in its key markets such as Milwaukee and Chicago.

“You may ask, ‘Is this me calling the bottom of that book?’” White said. “It might be, it might well be.”

BMO operates about 600 branches under the brand BMO Harris. Over the past year, the company has made a push to work with branch managers and sales staff to develop a sales-focused culture — a key reason cited by White for his growth prediction.

“The times that I’ve spent in the morning huddles in those branches in the last year have been really energizing,” he said. “I mean, the goals are up on the board, everybody knows what’s expected of them this week, and this month, and next quarter.”

BMO's a pullback from the U.S. retail market had, in many ways, set it apart from its Canadian peers.

At TD Bank Group, for instance, fiscal fourth-quarter retail loans in its U.S. division increased 5% from a year earlier to just under $67 billion. Royal Bank of Canada, meanwhile, continues to benefit from the company’s November 2015 acquisition of City National in Los Angeles.

During the conference, TD and RBC discussed plans to boost investments in various ways in their U.S. retail units.

TD, for instance, is looking at ways to increase active mobile customers by adding new bill-pay capabilities and other digital features, CEO Bharat Masrani said.

The Toronto company has 9 million U.S. customers and just under a third, or 2.6 million, of them regularly use a mobile banking app. Bigger U.S. banks, such as JPMorgan Chase, have expanded their mobile user base at a rapid, double-digit clip in recent quarters.

The company is “working hard to make the right investments to make sure that we are engaging with our customers,” Masrani said.

RBC, meanwhile, is exploring ways to increase lending for wealthy customers of its City National unit.

The company in the next year plans to launch new lending products to accommodate the needs of wealth management customers, RBC CEO David McKay said. The company also plans to continue hiring financial advisers and private bankers in U.S. hubs such as New York and Los Angeles.

RBC’s investments in its U.S. business have paid off. Profits at the City National unit increased 17% as of Oct. 31 compared with a year earlier.

“It’s a fantastic franchise — and the investment has been there,” McKay said.