Thursday, December 07, 2006

BMO Investor Day

RBC Capital Markets, 7 December 2006


CEO-designate Bill Downe and his team profiled 2007 business priorities.

Investment Opinion

• New Message Not Entirely New. CEO-designate Bill Downe freshened the delivery, but the core message was similar; BMO remains focused on hitting financial targets. In our view, Mr. Downe exudes a more hands-on and down-to-earth approach than his predecessor. It was clear he regards upgrading the domestic retail (P&C) performance as the top priority.

• New Accountability, Same Targets. Management is intent on raising accountability and we detected a renewed focus on improving operating leverage. That said, we might be more convinced if we saw a revenue growth and/or operating leverage target. In 2006, bank-wide adjusted revenue growth of 5.9% (constant currency) lagged 6.1% expense growth. Management will target a 2% revenue-to-expense gap in 2007 to achieve a 150-200bps gain in cost/revenue for 2007. This was not achieved in 2006 as management instead chose to invest for the future.

• Domestic P&C. Division head Frank Techar intends to harvest market share and revenue benefits by capitalizing on previous and on-going improvements in branch service and technology. These are reported to be having a positive impact on customer loyalty scores, which management expect should lead to heightened sales productivity and divisional profit.

• P&C Strengths & Weaknesses.Management highlighted: (i) 7% revenue growth in cards on 17% lift in balances and 23% more cards issued; (ii) commercial loan growth of 17%, deposit growth of 7%, and; (iii) rising customer loyalty scores (but still below peers). On the other hand, BMO is losing market share in: (i) core deposits; (ii) mortgages, and; (iii) small business. A turnaround in P&C lies in a more productive, larger sales force, and management hinted at raising front-line staff. We question how this would also involve lowering cost/revenue, at least in the near-term.

• Earnings Outlook.We estimate negligible EPS growth in 2007 and 8% in 2008. In our view, BMO is working against the drag of modest increases in loan loss and tax rate in 2007, moderating core earnings growth.

• Valuation. We recommend waiting for cheaper valuation. Our $70 price target (unchanged) is set at 12.5x our $5.61 2008 cash EPS estimate. Our target multiple of 12.5x is ~4% below our sector target P/E multiple. We are concerned about lack of growth in domestic retail banking and the potential for a large U.S. community bank acquisition. Our price target indicates a 2.2x our estimated book value of $31.48 (as at Oct 31/07).
The Globe and Mail, Andrew Willis, 7 December 2006

Across Canada, Bank of Montreal is losing the street-by-street battle for retail customers. Yesterday, the bank's top executives outlined how branch staff plan to win back clients from rivals.

BMO used a breakfast investor conference to set out newly named head of retail banking Frank Techar's strategy for winning market share in bread-and-butter banking products, such as mortgages and savings deposits. Financial results released last week showed BMO's domestic retail and commercial banking profit dropped 9 per cent from the previous year. Mr. Techar promised to turn the trend around in 2007.

"It is not lost on me that this is a big, important division, and we need to do a better job," Mr. Techar said. In a line that could easily come from a Wal-Mart manager, the former head of BMO's U.S. operations said he will target "higher customer loyalty and higher individual store sales."

The bleeding at BMO sees different rivals stealing clients in several major business lines. In a report this week, analyst James Keating at RBC Dominion Securities said that " BMO's branch network is fighting market share battles on multiple fronts: with TD Canada Trust in small business deposits and loans; with Royal Bank [of Canada] in mortgages, lines of credit and credit cards; and with Scotiabank on savings deposits.

"The newly installed chief of BMO's Canadian retail operation, Frank Techar, does have experience upgrading divisions with underrealized potential, but this looks like his biggest task yet," Mr. Keating said.

In the BMO presentation, Mr. Techar told investors that selling more mortgages and savings products are top priorities. He said the bank "did poorly" on mortgage rates in the past, and would try to fix those problems in its spring campaign. He also noted that BMO needs to fix the fact that it is outgunned on the sales front, with the lowest number of financial planners among the big banks.

Royal Bank of Canada leads the industry with 1,500 financial planners and 1,000 mortgage specialists in its branches. BMO has 590 planners and just 170 mortgage specialists in its retail system and Mr. Techar said he viewed this disparity "as an opportunity."

BMO also plans to make it easier for retail and commercial banking clients to open new accounts and apply for loans. Mr. Techar said client surveys have shown paperwork is a problem.

He also said the bank will move to a new "branch scorecard" that gives more "points" for bringing in new clients and cross-selling products to existing clients.

BMO will open 16 new branches in Canada this year and renovate another 25, while closing seven branches, Mr. Techar said.

"I think the biggest lever is the sales force -- the quality of those conversations, how we meet, greet and talk to the customers and put them at the top in everything that we do," Mr. Techar said.