Tuesday, January 02, 2007

BMO in China

Financial Post, Duncan Mavin, 2 January 2007

Tony Comper, chief executive at BMO Financial Group, is sitting at a meeting table in his large, but otherwise unremarkable office dozens of floors above Bay Street in downtown Toronto. It's late fall, and still a few days before he'll formally announce his plan to retire in March, alongside fourth-quarter results that are disappointing despite record profit for his last full year at the helm of Canada's fifth largest bank. But Comper isn't here on this day to reflect on BMO's recent performance, life after banking or even his legacy. Instead, he's talking about China and the growing role it has taken in BMO's long-term strategy under his leadership.

"It wasn't me who started this," he says. "Going back to the 1960s, each one of the successive chief executives has maintained a relationship." Modest words. BMO's modern history in China does go back to at least 1961, when it decided to finance Prime Minister John Diefenbaker's decision to sell wheat to the then-isolated Asian giant. But few of the bank's CEOs since have pursued growth in China with a focus -- or results -- equal to Comper's during his eight-year tenure in the executive suite.

What has he delivered? At the end of last summer, BMO became the first Canadian bank to get permission to provide banking services such as loans, deposits and trade finance in Beijing in the renminbi, the Chinese currency. Likewise, it was the first Canadian bank granted permission to sell derivative financial instruments such as futures and option contracts in China. BMO was also the first foreign bank to buy into a Chinese fund-management firm, taking a 17% stake in Fullgoal Fund Management Co. Ltd. in 2003. It now has a 28% position in the firm, which controls $3 billion in assets. Additionally, it was the first Canadian bank to underwrite a domestic bond in U.S. dollars as well as the first Canadian institution to participate as a marketmaker in China's foreign exchange market.

"From my perspective, BMO is the furthest ahead among Canadian banks when it comes to China," says one sector analyst, who has followed BMO and Comper closely over several years. "I attribute the progress to Tony's vision. He has been at the helm as the bank made these moves. He would have had to approve the strategy -- and I think it's a good long-term strategy."

Granted, some of Comper's achievements may sound obscure to those outside international banking circles. But they are significant steps in his effort to establish a lasting presence in a potentially huge market. China's 1.3 billion people are among the largest savers in the world and have stashed away an estimated $2 trillion. The country's banking industry, meanwhile, holds assets worth almost $4 trillion. Despite all that cash, its banking system remains woefully archaic, creating large opportunities for foreign banks to pioneer a wide range of services -- from credit cards and online banking to investment advice and commercial lending in a fast-growing business community. It's not so much that you can't ignore China, Comper says, "but why would you want to?"

Indeed, BMO, under Comper, has not been the only Canadian bank to seek opportunities in China. Royal Bank and Bank of Nova Scotia also have toeholds in the country (RBC has a fund-management joint venture with a local bank in the works, for example, while Scotiabank has a 2% stake in a regional bank). And all three claim lists of "firsts" in efforts to present themselves as players in the world's largest emerging economy.

Of course, no bank executive -- least of all Comper -- expects these investments to have an impact on earnings anytime soon. For the time being at least, China strategies are about gaining position and building platforms from which foreign banks can access what are likely to be massive opportunities in the modernization of China's banking system. "But 25 years from now," Comper says, "you might say, 'Gee, China's making 50% of your bottom line.' "

When Comper first visited China in 1993, as BMO's president, Shanghai's financial district was, in his words, "just a bunch of fields." Today, its skyscrapers are symbols of China's blistering economic growth. And, in the banking sector at least, the pace of growth is about to pick up. In December, Chinese regulators brought down protectionist barriers that until now had prevented foreign banks from entering the financial services market on the same terms as domestic players.

With 70 banks, including global leaders such as HSBC and Citibank, already in China, Comper describes the competition for presence and position as "pretty intense." It's about to get more so under the new rules. But BMO may have a secret weapon as it moves forward in the relationships Comper has already built. During his years as chief executive, Comper's done more than exchange gifts and handshakes with officials on his regular visits to China. (Although he's done that too, giving his Chinese hosts "typical" Canadiana, such as Inuit sculpture, and taking home a crate-load of "very tasteful" Chinese artifacts and calligraphy.) More importantly, he has sealed friendships and business relationships with important bureaucrats in a country renowned for red tape. He has even gained a seat on the Beijing Mayor's International Business Leaders Advisory Council, an influential board comprised of foreign business executives that advise Chinese officials on economic development. "Just as here in Canada, you have to focus on the relationships," Comper says. "You have to have an on-the-ground presence."

Those relationships will be tested in the years ahead. While BMO has made considerable progress in China under Comper, the challenges of turning the bank's position into actual earnings won't be easy. For starters, the domestic banking industry is plagued by bad loans, corruption and poor customer service, making the environment unstable for any newcomer. Likewise, bureaucratic hurdles can still stifle growth, despite an improving regulatory climate. "China's moving very quickly," Comper says. "But you have to understand that they're not quite there yet with the formal development of all the rules and regulations."

It's also unclear if Comper will play a role in BMO's future China policy. He still talks as though he'll be running the bank for years to come, and he's made no comments about his plans after his successor, Bill Downe, currently BMO's chief operating officer, takes over.

But this much is sure. Downe, a hard-numbers pragmatist, won't ignore the groundwork that Comper has laid. If anything, he'll be looking to turn that position into hard earnings. "In the future, we plan to introduce Chinese mutual funds to international investors," he said in a speech last September. "When regulations permit, we will offer BMO's U.S. and Canadian mutual funds to Chinese investors. We project up to $300 billion in assets will be available for management in China in the next five to 10 years."

For his part, Comper remains philosophical. He's headed to China again this month. He's not looking for the numbers Downe likes to quote, but to stay on top of growing business relationships. "We don't have a huge amount of capital there. But we're very pleased with the business initiatives we've started," he says. "China is for the future."