BMO poised to benefit from strong U.S. growth, CEO says

The Bank of Montreal is reaping the benefits of increasing consumer confidence and tax cuts in the United States, but the lender’s chief executive says there are signs Canada as a whole may not be so lucky.

In his first annual shareholder meeting as CEO, Darryl White told reporters that the new U.S. tax regime is already starting to sap investment dollars from Canada.

“I would say we are seeing some departure of capital as a result of the regime,” White said, after the meeting in Toronto. “I wouldn’t say it is profound at this stage, but I would say that in real-time, we are seeing the early stages of a decision that’s being made to invest, at the margin, in the United States before Canada with some of our customers.”

While a migration of capital southward could become a drag on the Canadian economy, BMO appears to be well positioned to benefit.

During his speech to shareholders, White said that BMO’s U.S. businesses now generate more than 25 per cent of total profits, and will continue to grow faster than the rest of the bank.

“Our business mix is well matched to the constructive economic environment in the U.S.,” White said. “In personal and commercial banking, we’ve seen steady growth as we take advantage of rising consumer confidence and the effects of lower taxes.”

The bank’s U.S. commercial banking business is still growing its footprint and the lender is delivering higher returns from its investment in its U.S. capital markets unit, said White, who succeeded Bill Downe as CEO last year.

Overall, he added, the U.S. businesses contributed $1.43 billion to its bottom line last year. BMO reported a profit of $5.35 billion for 2017, an approximately 16-per-cent increase from 2016.

“With each improvement in our U.S. business, we become that much more relevant to our Canadian customers,” White said. “We have a distinct competitive advantage.”

But tax reforms in the U.S. have some in Canada worried about the country’s competitive edge. White’s comments followed those of Royal Bank of Canada CEO Dave McKay, who said in a recent interview that a significant shift in investment from Canada to the U.S. was underway.

White said he does not think Canada currently has a competitiveness problem, but that it was something to keep an eye on.

“We would urge the various levels of government to ensure that we’re always thinking about the balance,” he told reporters. “And there are a lot of important initiatives that we’ve got and that we support on the social agenda, and at the same time, we ought to be always thinking about the balance with respect to the economic agenda.”

Concerns about Canada’s competitiveness are being heightened by uncertainty around the outcome of the North American Free Trade Agreement negotiations. However, despite that uncertainty, White said BMO was confident the value of the trading relationship would help produce a “positive conclusion.”

“We believe all parties see the benefits that flow from the freer movement of goods, services, people and investment,” he said. “Free trade has created growth opportunities for our Canadian customers and our U.S. customers.”

Despite a one-time, $425-million charge tied to tax reform in the U.S., BMO reported $973 million in net income for the quarter ended Jan. 31 of this year, with revenue growth of about 5 per cent compared with the year before. The bank expects to see its earnings benefit from the lower tax rate in the U.S. over the long run.

Among the Big Six banks, BMO also has the highest proportion of its loan book in business loans, at 49 per cent, according to a February note from CIBC World Markets.

“BMO’s exposure to the U.S. market is one of the pillars of a positive investment thesis on this bank,” CIBC said. “The bank has significant presence in the U.S. Mid-west and its focus on business lending leaves it levered to a strengthening U.S. economy.”

Financial Post

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