SpeechesAddress to Annual Meeting of Shareholders by William A. Downe, President and Chief Executive Officer, BMO Financial Group
Halifax, NS, March 20, 2012
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Thank you, Chairman, and good morning everyone.
On behalf of our entire team in Nova Scotia – and 47,000 employees across Canada, in the U.S. and at our locations outside of North America – welcome to the 194th annual meeting of BMO Financial Group.
In particular, let me welcome one of the bank’s Honourary Directors, John Ellis – who, at 96 years of age, is here this morning. Mr. Ellis retired in 1975 as Vice-Chairman of the Board and continued to serve as a Director until 1986. And he managed all of the bank’s branches here in Atlantic Canada between 1954 and 1958. Mr. Ellis, you do us a great honour by joining us today.
And it’s a pleasure to have so many other shareholders with us this morning – both here in Halifax and online via our webcast.
Je vous souhaite à tous la plus cordiale bienvenue à notre assemblée annuelle de la Banque de Montréal. Je suis heureux de vous voir parmi nous en si grand nombre aujourd’hui, dans le principal port atlantique du pays, d’où le plus fameux navire ambassadeur du Canada, le Bluenose II, reprendra la mer cette année.
As many of you know, when the original Bluenose was launched in 1921, it was financed by a group of Halifax businesses to compete in an international race. When I spoke here last fall, the theme was really about the same objective: International competition.
The occasion was 4Front Atlantic, a conference of business, political and academic leaders. It was spearheaded by George Cooper and BMO’s Vice-Chair, Kevin Lynch, who hails from Cape Breton. The conference focused on mobilizing for change – and competing differently – as Atlantic Canada positions itself to be at the forefront of success in the new global economy.
Discussions at the conference centred on three principal points: Leveraging our competitive advantages, developing new markets and enhancing the value of the products and services that the Atlantic provinces sell abroad. In short, we worked on a roadmap.
4Front is a part of BMO’s commitment to the development of good public policy. It reflects our belief that bringing customers into the discussion can stimulate innovation and competitiveness.
We’re creating many forums where business leaders can share perspectives about economic growth and its importance in ensuring a society that is fair and offers opportunity for everyone. To do that, these discussions are centred regionally – like today’s meeting – in the cities and communities where our customers live and where business gets done.
The dialogue that took place at 4Front drives change. We push for these kinds of discussions because we believe that being a for-profit company doesn’t mean we are simply here to maximize profit.
Great companies care and – in order to serve customers well – we care about the same things that customers believe are important. Above all, great companies want employees to be proud of what they do. And we are.
The annual meeting is a fixed point on the calendar when we can review BMO’s performance in a number of dimensions. And in preparation for this meeting we’ve had great dialogue with shareholders – the people who have an intense interest in our success and in how it is achieved.
This morning I want to look at three key elements that were central to our performance in 2011.
First: Our belief that there can be no compromise when it comes to the importance of customers. Our success as a business depends entirely on our customers’ success, and on helping them succeed. Taking good care of our customers and acting in the long-term interests of our shareholders represent a single commitment for BMO.
This is at the heart of who we are. It defines us. It differentiates us. It is the key to our profitable growth, and to accelerating that growth.
The second element: The progress we are making in the U.S. – building new customer relationships, bringing our customer vision to new markets and unlocking the tremendous potential that BMO’s expanded North American footprint brings us.
And third: Our strategy, underpinned by a strong, consistent brand – predicated on managing within a sound regulatory framework – and, as I note in this year’s Annual Report, grounded in our belief that the keys to prosperity and growth in North America are not lost.
If there’s one overall message I hope you’ll carry away from today’s meeting, it’s this: By giving customers what they expect from a great bank– and nothing less – BMO, the bank you’ve invested in, will outperform where it counts.
This is not about aspiration. Our confidence is built on a solid foundation – and it’s validated by the record results I’ll review with you this morning.
But let me begin by drilling deeper into the first of my three themes – how BMO’s attention to making every customer an advocate translates into long-term growth.
BMO has staked out a distinct position in the marketplace. Our preoccupation with customers’ success – and with understanding what they need, so they can feel confident about their finances – has established the bank as a leader, not an imitator.
A case in point is the initiative we took, beginning in January, to differentiate BMO in the home mortgage marketplace.
We took a long, hard look at the Canadian housing market and concluded, on the one hand, there was a legitimate concern that house prices – particularly in the largest cities – had been rising at a rate that was simply unsustainable. With growing concerns over household debt, a soft landing in housing is in the best interests of our customers and the national economy.
At the same time, our customers need access to financing – so they can become homeowners today. In the current low interest rate environment, there is risk to borrowers, given the national trend to longer amortization periods. The U.S. ten-year Treasury rate has increased 60 basis points since September – a sign of upward pressure on interest rates that’s coming.
It is for this reason we are emphasizing a 25-year amortization with a 5-year or 10-year fixed interest rate.
The logic is this: With a shorter amortization, homeowners are able to build equity faster and have the confidence of knowing what their monthly payments will be, no matter where interest rates go in the future.
Both our 5-year and 10-year terms offer competitive rates that help keep home ownership affordable – whether for people who are refinancing a mortgage renewal, or for those who now have the chance to buy their first home.
We acknowledge the possibility of broader regulatory change to the market framework – and BMO is being proactive in structuring our offers to speak directly to customers. When we launched a similar offer in January, it turned a lot of heads. It also generated a significant volume of new business – more than half of it from customers who did not previously have mortgages with BMO.
Our home mortgage campaign is resonating across Canada. It has created new traffic in our branches, in the call centres and on the web – giving us the opportunity to talk to customers about other dimensions of their financial lives where we can be of help.
The bottom line is we’re encouraging existing and prospective customers to make better financial decisions – and we’re forming the foundation for new and expanded long-term relationships.
And if all of this means we’re changing the competitive landscape in the Canadian marketplace – well, we’re changing it for the better.
This is what customers have come to expect from BMO in every area of our business.
When we committed to providing a total of $15 billion in new loans to small and medium-sized businesses in Canada and the U.S. over the next three years, the decision was grounded in our ability to understand and anticipate customers’ needs.
And it reflected our belief that we have a key role to play in economic growth. Banks are vital intermediaries in the creation of economic prosperity, and we take that responsibility very seriously.
It’s this focus on the customer that keeps BMO at the forefront of Canadian commercial banking and is establishing BMO Harris Bank as a market leader in the U.S. Midwest.
This brings me to my second main topic this morning: The expansion of our North American footprint.
You will recall that two years ago at our annual meeting, we said unprecedented opportunities would emerge from the disruptions in the competitive landscape: New regulation, higher capital and liquidity standards and the withdrawal of competitors from some segments of the market.
Smart companies that acted quickly – with a full assessment of risk – have been able to accelerate growth and performance. For us, the creation of BMO Life Assurance, the purchase of the North American franchise of Diners Club, the acquisition of Lloyd George Management and our incorporation in China are prime examples.
At this meeting last year I briefed you on the most transformative example of our disciplined acquisition strategy.
The purchase of Marshall and Ilsley was the largest in BMO’s history and one of the landmark financial service combinations of recent years.
When the transaction closed in July, we had completed six months of work as part of a disciplined, well-planned agenda to combine two highly regarded U.S. banks. And with the introduction of BMO Harris Bank, we doubled our U.S. presence.
As with all sound acquisitions, the assumptions underlying the decision were necessarily prudent, given the economic backdrop. We continue to have confidence in those assumptions, and since the announcement have increased our estimate of cost synergies from $250 million to a figure in excess of $300 million.
To date, we have captured more than $100 million in annual run-rate savings. This is about $40 million ahead of where we expected to be at this point in the integration.
The banking platform conversion, which will capture a major portion of the remaining synergies, is on track to be largely completed by the end of the year.
But the real story about our U.S. expansion is revenue – as we combine the strengths of two banks to create a business that delivers greater value than either bank could achieve on its own.
Each day our bankers are in the community – having conversations and winning business – contributing to the economic recovery that we are beginning to see in the U.S. – and helping to fuel the economic engine of the nation, the Midwest.
A critical point here is that the value of our U.S. investment is not just in what we own, but where it is.
Our strategy has consistently called for growth in the contiguous states around Illinois. We have a strong presence in Chicago, America’s third-largest city with a metropolitan population of almost 10 million. In the six surrounding states, we see a resurgence of traditional economic strength, along with a new focus on innovation in areas like precision manufacturing, which are re-energizing the export component of the U.S. economy.
Signs of recovery in the Midwest outpace the national trend.
According to the Chicago Fed, manufacturing output in January for five key Midwest states increased by 9% while national output rose 4.7%.
We have a #1 market position in Wisconsin. We have a #2 deposit share in Chicago and a #3 market share overall in the Midwest states that we serve.
To add some perspective, we now have as many branches in Milwaukee as in Vancouver. BMO is not simply a Canadian bank with significant U.S. holdings. We’re a North American bank – headquartered in Canada, and well positioned to pursue further growth.
At last year’s annual meeting, we expressed our belief that we could generate $1 billion in annual earnings in the U.S. in the medium term.
Our progress to date gives me confidence that this goal is within our reach. We have a strong, diversified and growing revenue opportunity, and a valuable foundation for future growth in personal banking, in commercial and investment banking and in wealth management.
This brings me to the third and final topic I wanted to touch on today: BMO’s consistent adherence to a clearly defined strategy.
Our strategy rests on a number of specific commitments, starting with the pursuit of our vision: To define great customer experience.
To do this and grow profitably, we have to ensure that our service commitments, and the products and offers we develop, are delivering value to the customer and capturing value for the bank.
Building a high level of satisfaction in every channel – and matching customer needs to the most efficient ways they can be met – is the bottom line of successful relationship banking.
This is all part of our uncompromising focus on the supremacy of customers at BMO. Our employees come to work each day confident in what the bank stands for – bringing the energy and talent necessary to fulfill our customer promise.
The essence of the bank’s strategy is to build on our market-leading presence in our North American businesses; on our growing service capabilities in select global markets; on sound governance; and on the strength of our brand across every business and customer segment.
The transformation we have experienced as a company extends beyond our personal and commercial business.
Turning now to our financial performance, in 2011 BMO had a record year as net income increased 16% to $3.3 billion.
This historic performance was driven by double-digit revenue growth – and
double-digit earnings growth across each of our operating groups.
And earnings per share increased by more than 10% to $5.26.
Our three-year total shareholder return of 17.4% was in the top tier of our Canadian and North American peer groups.
Our return on equity was 15.3%.
In fact, BMO has achieved return on equity of 13% or better in 21 of the past 22 years. Only one other bank among our North American peers has matched this achievement. Disciplined risk management is a foundational pillar of our strategy and it contributes to earnings stability.
Beginning with the first quarter of 2012, Canadian companies now report
results in accordance with International Financial Reporting Standards.
Record earnings provide tangible evidence that the course we’ve charted for BMO is the right one. And in light of these results, some shareholders have expressed interest in our dividend outlook.
The bank has demonstrated its capacity to pay and grow dividends over time. BMO’s dividends have grown at a compound annual rate of more than 9% over the past 15 years – above our peer group average.
Earnings growth will drive future dividend increases, consistent with disciplined capital management. Over the last four quarters we have paid out approximately 50% of our earnings. And the current yield – above 4.7% – is highly attractive to shareholders who value a strong dividend.
At the most fundamental level, BMO’s strategy has succeeded because we’ve stuck to our principles. Our financial achievements are grounded in a dedication to responsible management and backed by our insistence on transparency and ethical governance.
We understand that banks are entrusted with a unique role in society. Banks are vital intermediaries, helping to create jobs, open new markets and drive economic well-being.
As at the 4Front Conference, this means stressing the themes of innovation and productivity in the belief that both are important contributors to North American competitiveness.
Accordingly, improving the bank’s own productivity is an area of renewed focus – and everyone at BMO is participating in this effort. We clearly have a responsibility to ensure that as BMO achieves top-line growth, we’re also managing our expenses. And I think we can do a better job.
We know that a cumbersome process for employees more than likely is also inconvenient for customers. We intend to be a more efficient bank, with greater operating leverage and a strong culture of expense management – while, at the same time, investing in parts of the business that will generate high-quality earnings.
I began this morning by saying I was going to talk about the importance of customers, the future impact of BMO Harris Bank on our U.S. business and the overall strategic direction of BMO. When we look back over our own progress against our strategic roadmap, the milestones are clear:
Five years ago, we had just under 35,000 employees. Today we have more than 47,000.
Those employees serve our customers in more than 1,600 branches across North America – up from about 1,200 in 2006.
BMO’s assets under management and administration have grown from $361 billion to $526 billion in five years.
Since 2006, revenue has climbed from $10 billion to $13.7 billion.
And it is in this context that I’d like to recognize the contribution of David Galloway, Chairman of our Board of Directors, who since 2004 has overseen BMO’s evolution into a bank that delivers quality, sustainable growth.
David retires today after serving as a valued member of the board for a total of 14 years – the past eight as our first non-executive chair. During his tenure, we shaped the customer-centric vision that defines BMO today and will drive our future success. During my time working with David, I have been struck by his acute sense of obligation to the customer – and by his appreciation for how important it is to deliver to shareholders the returns they expect.
I know I speak for everyone at the bank in thanking David for his wise counsel and steadfast leadership.
Today, subject to shareholder vote, we also welcome Robert Prichard as our new Chairman.
In a distinguished career spanning business, education and law, Rob has combined consummate leadership with a dedication to the highest principles of responsible management. He brings to the role a rare combination of intellect, empathy, practical business sense and a commitment to superior performance in everything he does.
I know he shares the BMO view that being accountable to our shareholders – to all of you in this room – is the cornerstone on which all of our other responsibilities rest.
Rob and I, like everyone at BMO, also share the belief that creating shareholder value and acting in our customers’ interests are two sides of the same coin. This is the fundamental insight driving our confidence in the future.
We know our overall strategy is working – we can see that from the results. It’s working because every commitment we make is aimed at advancing the needs of our customers.
In the U.S., we have confidence in our expansion strategy for the same reason: Our acquisition was a perfect fit for a bank that makes great customer experience its number one priority.
And when it comes to developing specific products and initiatives – we’re confident of success because we know that we’re moving the needle in the marketplace.
As we say in our annual report, the conversation begins and ends with customers.
We may be guiding a Wisconsin-based company as it pursues new business opportunities in Ontario. Or showing a Haligonian couple how they can responsibly afford their first family home.
Wherever we carry on the conversation, we know that by helping our customers succeed – by sticking to our strategy and delivering on our vision – we’ll continue to drive BMO’s success and the success of all our stakeholders.