BMO Financial Group Targets Profitability Enhancement in U.S. Operations
BMO Financial Group, aiming to elevate the profitability of its U.S. segments, has unveiled a strategic initiative focused on talent acquisition, technological advancement, and optimizing its branch presence in the United States.
On Tuesday, the newly appointed U.S. president, Aron Levine, provided a preliminary overview of BMO’s ambitions to bridge the gap between its current return on equity of 8% and an aspirational target of 12% within the next three to five years.
Levine, who joined the firm in July, articulated to analysts that the consolidation of the bank’s U.S. divisions, investment in human resources, enhancement of technological infrastructure, the inauguration of new branches, and refurbishment of existing locations are vital components to foster “sustainable, profitable loan and deposit growth.”
“Investment in the business is paramount, and it is essential to capitalize on our strengths, the scale we possess, our North American capabilities, and our robust treasury and capital markets platforms,” Levine remarked during a discussion concerning the bank’s third-quarter financial results.
Such initiatives cultivate optimism regarding growth potential, he asserted.
BMO, the third-largest bank in Canada by assets, integrated its U.S. personal, business, and commercial banking segments with its wealth management division earlier this summer.
The American market represents a significant avenue for BMO, contributing approximately 40% of its earnings. The bank’s operations extend through the Midwest and into California.
This organizational restructuring coincided with Levine’s appointment and other pivotal leadership alterations, notably influenced by the forthcoming retirement of Erminia “Ernie” Johannson, who has led BMO’s North American personal and business banking division since 2020, with her retirement scheduled for early 2026.
BMO has yet to disclose specific strategies regarding its 1,000-branch network in the U.S., including prospective new branch establishments or renovations of existing sites.
The emphasis on augmenting return on equity is a direct response to the challenges BMO has faced following its acquisition of Bank of the West, located in San Francisco, in 2023. The bank did not realize the anticipated revenue synergies from this transaction within its expected timeframe.
Additionally, subdued loan demand linked to lackluster business activity in the U.S. has contributed to weaker overall performance.
To recalibrate its strategy, BMO executed a balance-sheet restructuring earlier this year, shedding a U.S. credit card portfolio and exiting a non-performing franchise loan portfolio. Additionally, the bank has begun reducing its reliance on higher-cost certificates of deposit and noncore deposits in pursuit of lower-cost funding.
The aspiration for a 12% return on equity within the U.S. is integral to BMO’s broader objective of achieving a minimum company-wide return on equity of 15% over the next three to five years. This performance metric is pivotal in assessing a company’s efficiency in profit generation.
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In the third quarter, BMO reported a company-wide return on equity of 11.6%, a notable increase from 10% in the previous year’s quarter. For the year-to-date, the return on equity stands at 10.5%, while the figure for all of 2024 is recorded at 9.7%.
During the quarter concluding in July, BMO’s U.S. net income reached $516 million, representing a 50% increase compared to the same quarter the previous year. This performance was fueled by a 3% revenue increase attributed to heightened net interest and fee income, alongside reduced expenditures and a smaller provision for credit losses.
Net interest income was reported at $1.5 billion, reflecting a 2% rise from the prior year, while fee income surged 12% to $317 million. Conversely, total expenses noted a decline to $1.06 billion, down 2% year over year.
In a research note, John Aiken, an analyst at Jefferies Research, expressed that while BMO’s loans and deposits are “trending down,” the margins remain stable, emphasizing that only the U.S. retail and corporate segments surpassed consensus expectations.
Average loans and deposits within the U.S. segment experienced a dip of approximately 2% each.
“Despite these challenges, the bank excelled at managing costs and demonstrated impressive operational leverage,” Aiken commented. “Furthermore, it is making strides towards its ROE targets, and the aggressive application of its enhanced share repurchase plan should facilitate this progression.”
On Tuesday, BMO declared an expansion of its share repurchase initiative, pending regulatory approval, allowing for an additional buyback of 30 million shares. From May to July, the bank managed to repurchase six million common shares.
Overall, BMO reported quarterly net income of CA$2.3 billion, a 25% year-over-year increase from CA$1.9 billion during the same period last year. Earnings per share reached CA$3.14, surpassing analysts’ predictions of CA$2.85, as reported by S&P Capital IQ.
In terms of credit losses, provisions totaled CA$797 million for the quarter, diminishing from CA$906 million in the year-ago quarter, with CA$240 million allocated to BMO’s U.S. operations—an improvement from CA$368 million in the preceding year.
In response to an analyst’s inquiry, Chief Risk Officer Piyush Agrawal assured that BMO’s impaired loans in the U.S. have reached their peak.
“There will be variability from quarter to quarter,” Agrawal noted. “A couple of significant files could influence the outcomes due to the nature of our portfolio. Nevertheless, I can confidently state that we have surpassed the peak of impairments in the U.S.”
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