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Carefully Nurtured Advantages Make BMO Financial Group the Canadian Leader in U.S. Banking

While many of the big Canadian banks are targeting U.S. expansion, BMO Financial Group has several distinct advantages that have helped the enterprise execute a strategy that has made it the Canadian leader in U.S. banking.

That's the strong message that William Downe, deputy chair, BMO Financial Group, delivered today to investors and analysts attending the CIBC World Markets Frontenac Institutional Investor Conference in Quebec City.

"We already have a strong franchise in some of the most lucrative markets in the United States. We have a proven track record in acquisitions. We have a proven capacity to improve productivity significantly. We have been executing the same strategy at a steadily accelerating pace. It is a strategy that makes us the Canadian leader in U.S. banking," he said.

"We believe that we have a business model that differentiates us from the competition. We can blend the best of two banking models - community banking and network banking - and create a powerful growth-generating bank."

Downe noted that Canadian banks, which are highly centralized and depend upon volume to achieve efficiencies of scale, operate under a network model, offering customers value based on convenience and consistency. Downe says that these banks are driven by process, as they optimize efficiency to keep costs down.

"At the Harris, on the other hand, we have defined ourselves with a community-based model. It is differentiated in its local presence and relationships with its customers," he said.

"We are using the capacity and infrastructure from our Canadian experience to improve U.S. performance and productivity, while not losing the strength of our relationships with our customers. The result: a customer-focused regional bank that can achieve the productivity, resources and back-office processing scale of a big national bank," he said.

Downe said BMO's goal is to become a leading Midwest Personal and Commercial Bank, noting that Harris now has a 9.9% share of retail deposits in greater Chicago - just 50 basis points behind the leader.

"Our distribution network is well located and well entrenched. We receive high scores in customer satisfaction - which remains a top priority," he said.

Noting that BMO's U.S.-based businesses account for $372 million, or 21% of BMO Financial Group's net income so far this year, Downe indicated that BMO can increase its earnings by growing its U.S. operations through accelerated organic growth in personal and commercial, mid-market and individual investing markets, and through selective and primarily retail acquisitions, targeting the Chicago area and the contiguous mid-western states.

Mr. Downe outlined BMO's strategic approach to the U.S. market and spoke about they key priorities that will help the organization improve productivity and overall U.S. performance. Excerpts from his address follow below:

Growing the Personal and Commercial Banking Franchise
"We have made personal and commercial banking a priority for expansion. Following our acquisition of Harris in 1984, we maintained the existing model for a decade before we began to acquire retail banking locations. Now we see acquisitions as a key part of our growth strategy, and we have the opportunity to accelerate the pace," said Downe.

"We continue to put a heavy emphasis on expanding our personal and commercial banking franchise in the Chicago area, and we anticipate further expansion through a combination of organic growth and acquisitions. In our goal to become the leading Midwest personal and commercial bank, we will continue to improve the efficiency and ROE of this business and, in the process, close the gap on the market share leader in Chicagoland."

"Harris has a distinct advantage with its existing, well-established branch network in many prime locations and an inventory of future sites secured. We have another advantage: our brand is clearly associated with a community banking customer experience. With these advantages, we have not only defended our market share, we have grown it."

Harris Nesbitt - Building an Integrated North American Investment and Corporate Bank
"We are building an integrated North American investment and corporate bank with our U.S. businesses operated under the Harris Nesbitt brand."

"We are a mid-market firm in the Midwest, targeting private and smaller-cap public companies. Currently our client mix is 75% private and 25% public, with more focus on expanding the public client base."

"The Midwest is the largest contributor to our U.S. Investment & Corporate Banking business. In the Midwest, at least 10,000 potential clients meet our criteria. They collectively spend about US$8 billion a year on banking-related services. Today, we have relationships with more than 1,500 of them, and many of these relationships have endured for decades."

"Demographics suggest that 80% of the companies we are targeting will change ownership within a decade. There will be an enormous market for mergers and acquisitions, and we are well positioned to play a part."

Wealth Management Business Will Play an Increasingly Important Role
"There is a highly competitive marketplace in wealth due to the expectation that profit pools from retirement assets will continue to grow as the baby boom matures. This is a fragmented industry and we enjoy an excellent reputation that we will build on as the investment climate continues to improve."

"We have made important strides in reshaping our wealth management businesses into a streamlined model that will endure during downward market cycles. We are able to serve the full spectrum of wealth clients - from the mass market to the ultra high net worth - in all of the important wealth markets from coast-to-coast."

"Since 1999 we have grown our wealth operations through acquisitions and organic growth initiatives. Clearly we are focused on the performance of a business in which we have invested $1 billion. But consider what we acquired as a result:

$31.84 billion in assets under management;
585,000 new accounts; and
A geographic footprint that covers nine states.

Harris Private Bank Continues to Expand in Affluent, High-Growth Markets
"Harris Private Bank is our comprehensive wealth management solution for the high-net-worth and ultra-high-net-worth individuals. We continue to expand in existing, high-growth, affluent markets. We've restructured the organization and rounded out our product offering with the acquisition of Sullivan Bruyette and myCFO. These provided important pieces to our integrated wealth offering, allowing us to target the serious, high-net-worth investor."

"We are concentrating on markets where we have momentum, including Chicago, Seattle, and Arizona, and we are focusing on improving productivity and on growing organically."

Robust Outlook for Harrisdirect Online Brokerage
"For Harrisdirect - our brokerage offering - the outlook for growth is robust. Harrisdirect offers an effective pathway into our wealth management business and it continues to be an integral part of our offering. Our acquisitions of both CSFBdirect and Morgan Stanley provided access to our target client segment - which is "Disciplined, Self-Directed On-Line Investors" with investable assets of at least $100,000. We will continue to fine-tune this business so that any uplift in the market will send an increased percentage of revenue straight to our bottom line."

Three Priorities for BMO's U.S. Business
Mr. Downe indicated that BMO's overall U.S. priorities are to improve productivity and improve the performance of our U.S. operations. To get there, he outlined three goals.

Grow the business both organically and through acquisitions.
Client satisfaction: By building its business around enduring relationships with key clients in all market segments, we have earned our reputation as a high quality client service bank.
Shift the cost structure to a source of competitive advantage; eliminate the duplication of overhead across all corporate functions, and streamline operating platforms and governance frameworks.

A winning strategy
"BMO's U.S. operations are highly complementary: community banking, investment banking, and wealth management:

Community banking, through the branches of the Harris Bank in Chicagoland, accounts for 29% of total U.S. revenue.
Investment banking, where we focus on corporate mid-market customers through Harris Nesbitt, accounts for 47% of our U.S. revenue.
Our Wealth Management business accounts for 20% of our U.S. revenue, principally from the Harris Private Bank and Harrisdirect.

We have defined a winning strategy for each business - strategies that we intend to continue."

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