Thursday, July 20, 2006

New US Management May Mean BMO's on the Prowl

Financial Post, Duncan Mavin, 20 July 2006

Bank of Montreal shuffled its leadership pack at Harris Bancorp yesterday, as the bank positions itself to pounce on potential acquisitions in the fragmented United States banking sector.

Harris Bank installed a new chief executive who will look for growth targets while a beefed-up senior management team will take responsibility for day-to-day operations. The Chicago-based bank's new CEO is Ellen Costello, a 23-year BMO veteran and an investment banker with years of merger and acquisitions experience.

Her appointment confirms that BMO is willing to spend some of its $3-billion in excess capital on the expansion of the Harris Bank network, said BMO's chief operating officer Bill Downe.

The bank is looking to double its branch network from 200 Harris Bank branches throughout the "Chicagoland" area and Northwest Indiana to about 400 branches, he said.

Ms. Costello moves from New York, where she headed up BMO Capital Markets. The bank also appointed a new president of community banking and a new head of business banking, among other changes.

"We have added to the team and signalled that our commitment is to grow the business," Mr. Downe said.

Some industry-watchers had questioned BMO's commitment to growth after the bank announced it was targeting the highest dividend-payout ratio on Bay Street of 45% to 55% in May.

However, Mr. Downe has since insisted that growth, including acquisitions, is still on the agenda, especially in the United States. He will be hoping the latest management shuffle will put the issue to rest.

"I think BMO was waiting for something to fall into their lap that wasn't overly expensive, but perhaps they're thinking that they haven't been aggressive enough," said Mario Mendonca, an analyst at Genuity Capital Markets.

Ms. Costello said the bank is already working on "a lot of prospects" for acquisitions. "It is a priority that's always in focus and I expect to be spending a good deal of my time on it," she said.

In fact, the U.S. banking industry is said by some observers to be ripe for consolidation because the intense competition among smaller banks means they are forced to offer low interest rates on mortgages while faced with pressure to increase the rates on deposits because of rate hikes by the Federal Reserve. Those pressures could force smaller banks to sell up to bigger banks, including Canadians.

Mr. Downe said comments from Federal Reserve chairman Ben Bernanke yesterday that rate increases could be put on hold do not necessarily mean there will be fewer potential targets. Instead, he said, Mr. Bernanke's comments indicate a cooling in the U.S. economy that could nevertheless lead to some consolidation in the banking sector.

Meanwhile, BMO's Harris Bank management shuffle looks remarkably similar to recent changes at TD Banknorth, the U.S. subsidiary of its Canadian rival, Toronto-Dominion Bank.

While BMO's Harris Bank has so far had little luck finding the right target, Banknorth has swallowed Interchange Financial Services and Hudson United Bancorp, bought earlier this year for a total of almost US$2.5-billion.

In June, TD appointed chief risk officer Bharat Masrani as president of Portland, Me.-based TD Banknorth. In his new role, Mr. Masrani is responsible for running Banknorth's everyday operations.

Although chief executive Bill Ryan has said it is unlikely Banknorth will make more significant purchases until 2007, the appointment of Mr. Masrani will enable him to spend more time looking for targets and integrating the purchases they have made.