Incorporated: 1822
NAIC: 52211 Commercial Banking
The Bank of Montreal is one of the largest banks in Canada. It also has a substantial presence in the United States. The bank operates over 1,200 branches spread across North America, Europe, Latin America, and Asia. Bank of Montreal owns Harris Bankcorp, the fourth largest bank in the Chicago area. Another major subsidiary is the investment firm BMO Nesbitt Burns. Nesbitt Burns is a premier international equity trading company. Bank of Montreal also owns the New Jersey-based investment firm CSFBdirect Inc. That company is part of Bank of Montreal's wealth management division, which focuses on affluent individual investors. In a joint venture with Royal Bank of Canada, Bank of Montreal runs the largest credit card processing company in Canada, Moneris Solutions Corp. Bank of Montreal offers a full array of banking products, with over 30 different lines of business.
Until the late 20th century, Canada's banks were on the whole stodgy, sheltered, and highly regulated institutions. The Bank of Montreal was among the fustiest and most traditional of them all. But two singular events in the 1970s and 1980s--the arrival of an aggressive new CEO in 1975 and the deregulation of the Canadian banking industry in 1985--shook up this old bank and forced it to deal with the increasing complexity and internationalization of the financial world. By 2000, the bank had a global presence and was rapidly expanding both in Canada and the United States.
If any bank had a right to be stodgy and traditional, it was certainly the Bank of Montreal, whose roots stretch back to the early 19th century. It first opened for business in 1817 on St. Paul Street, in the heart of Montreal's business district, as the Montreal Bank. It did so without an official charter and was forced to rely on American investors for nearly half of its initial capital. But within five years the new bank had proven its worth to the community, and it was granted a charter in 1822 as the Bank of Montreal. By then, all but 15 percent of its capital stock had been repatriated.
During its early years, the bank engaged in bullion and foreign-currency trading in addition to its lending activities. In 1827 and 1828, it was forced to omit its dividend for the first and last time after the bulk of Quebec's fur-trading activity shifted to the Hudson Bay, depressing the local economy and causing a number of loan defaults. During this time, however, the Bank of Montreal also began its long financial and managerial association with the expansion of Canada's canal and railway systems. In the late 1830s, it prospered despite political upheaval. The Bank of Montreal acquired the Toronto-based Bank of the People at that time; thus, when Upper and Lower Canada were united into the Province of Canada in 1841, its total assets exceeded C$4 million.
During the early 1860s, the Bank of Upper Canada, which was then the Canadian government's official banker, slid inexorably toward failure, and in 1864 the Bank of Montreal was appointed to take its place. It continued in this capacity until the establishment of the Bank of Canada in 1935. The bank also began to expand its branch network when Canada achieved full political unity in 1867, opening two offices in New Brunswick. It opened a branch in Winnipeg, Manitoba, in 1877 and followed the Canadian Pacific Railway westward as railroad construction opened up the prairie for settlement. Bank of Montreal branches appeared in Regina, Saskatchewan, in 1883; Calgary, Alberta, in 1886; and Vancouver, British Columbia, in 1887.
The bank already had two foreign offices by this point; it had opened one in New York in 1859 and another in London in 1870. The Bank of Montreal used its foreign representation to expand into investment banking in the late 1870s. It joined a syndicate of London bankers in underwriting loans to the province of Quebec and the city of Montreal. In 1879, it underwrote a Quebec securities issue and floated it on the New York market. And in 1892, it became the Canadian government's official banker in London, underwriting all of the national government's bond issues on the London market.
At the turn of the century, the Bank of Montreal embarked on an acquisition spree that would make it Canada's largest bank by the outbreak of World War I. It improved its position in the Maritime Provinces and northern Quebec by acquiring the Exchange Bank of Yarmouth, the People's Bank of Halifax, and the People's Bank of New Brunswick. In 1906, it bought out the bankrupt Bank of Ontario.
In 1914, the Bank of Montreal had C$260 million in assets, 179 offices, and 1,650 employees. Nearly half of its mostly male workforce enlisted in the military at the outbreak of war, but the hiring of women in large numbers made up for the loss. In fact, the war had a rather salutary effect on the bank's finances due to the sale of war bonds, which were quite popular. World War I also marked the end of the London market's role as the Canadian government's main source of external financing, as the London securities markets were closed to foreign issues from 1914 to 1918, and the Bank of Montreal and the government began to float their bond issues in New York.
An economic crash in 1920 followed a short postwar boom, and the crisis forced Canadian banks to consolidate. The Bank of Montreal had already acquired the British Bank of North America in 1918; it bought the Merchants Bank of Canada in 1922 and the Montreal-based Molsons Bank in 1925. These acquisitions increased its branch network to 617 offices, more than three times what it had been during the war.
The depression that struck Canada in the 1920s, however, was not as serious as the Great Depression of the 1930s. In 1933, Canada's gross national product was almost half of what it had been in 1928, and the number of unemployed increased nearly thirteen-fold. Bank of Montreal's assets were worth nearly C$1 billion in 1929, then dropped below C$800,000 for five consecutive years. The Depression finally ended with the outbreak of World War II, during which the Bank of Montreal, just as it did during the previous war, lost large numbers of employees to the armed services and also made money from the sale of war bonds.
The years after World War II brought prosperity and rapid economic development to Canada. Canadian banks also prospered, but in a regulated and noncompetitive atmosphere. "It was sort of a clubby affair," Bank of Montreal executive vice president Stanley Davison told Fortune in 1979. Canadian law limited the interest banks could charge on their loans to 6 percent, and power in the banking industry was concentrated in a group of five major banks, of which the Bank of Montreal was one. During this time, however, the Bank of Montreal also earned itself a reputation for stodginess and an unwillingness to adapt to change. In the mid-1960s its earning performance began to weaken. Then, in 1967, an amendment to the Canadian Bank Act eliminated the interest-rate ceiling, opening up new opportunities in the area of consumer and small-business lending. The Bank of Montreal was caught unprepared to keep pace with its competitors.
Its financial performance was further eroded by a costly but necessary computerization program. The Bank of Montreal's accounting procedures seemed not to have changed much since the age of the quill pen; when CEO Fred McNeil assumed his post in 1968, he asked a personnel department executive for a copy of the departmental budget and the executive replied: "Budget? No one has ever asked us to prepare one." But computerizing the bank swallowed up more and more money. Its projected cost in 1969 was C$80 million, and the figure was repeatedly revised upward for several years thereafter. In 1972 the bank started a credit card program, and the start-up costs added even more financial liability. The Bank of Montreal was the last of Canada's five major banks to bring out a credit card.
Into this state of affairs stepped William Mulholland, who was named CEO in 1975, when McNeil became chairman. Mulholland was an American. Formerly a partner at the prominent investment bank Morgan Stanley, in 1969 he was named president of Brinco Limited, a Canadian mining company. After taking the top job at the Bank of Montreal, he dodged the controversy over an American heading up one of Canada's largest banks by promising to consider adopting Canadian citizenship.
Mulholland's aggressive and uncompromising management style was once described as "chewing through underlings with a chainsaw" by Canadian Business magazine, and a number of senior executives left the bank during his tenure. But the bank's condition also improved immediately after he took office. Mulholland closed down 50 unprofitable branches during his first five years in office, revised the Bank of Montreal's internal pricing system to reflect the cost of funds more accurately, and modernized procedures for asset and liability management. He was also unafraid to bring in outside help, as he did when he recruited IBM executive Barry Hull to get the computerization program on track. The bank opened its first computerized branch office in 1975, and all 1,240 of its branches were plugged into the computer system by 1979.
The Bank of Montreal also sought to internationalize under Mulholland, joining a trend in which just about every one of the world's major financial institutions participated since the late 1960s. In 1978 it purchased a 25.1 percent interest in Allgemeine Deutsche Creditanstalt, a medium-sized West German bank. Also in 1978, the Bank of Montreal tried to expand into the American retail banking market when it began negotiating the acquisition of 89 branch offices from Bankers Trust Company. Mulholland forged ahead with the deal despite analysts' misgivings, but negotiations broke down in 1979 and the deal was never consummated.
The Bank of Montreal suffered in the early 1980s under the strain of loans to Latin America and to oil and real estate interests in western Canada that went sour. However, in 1984, it finally obtained entry into the American retail market when it acquired Harris Bankcorp, then the third-largest bank in Chicago, for $547 million. As with the Bankers Trust bid, banking analysts expressed their doubts over the deal; the Bank of Montreal paid $82 per share for Harris stock, or nearly twice its previous price. But two years later, the analysts had changed their opinion entirely. The Harris acquisition made the Bank of Montreal one of the leading foreign institutions involved in U.S. commercial and industrial lending and enhanced its foreign exchange capabilities. The strong performance of regional bank stocks in 1985 and 1986 also made the deal seem like a bargain in retrospect.
In 1985, the Progressive Conservative government of Prime Minister Brian Mulroney decided to deregulate Canada's financial system, a move that blurred the traditional lines between insurance, banking, and securities brokerage. Companies that had been restricted to one business were allowed to diversify into others, increasing competition among individual firms but also the power of holding companies seeking to build financial service empires. One immediate consequence of deregulation was a surge in merger-and-acquisition activity involving Canadian securities firms. Growing foreign investment in North America helped accelerate this trend, as did an increasing demand for stocks among domestic small investors (one brokerage executive told Barron's: "It wasn't too long ago that the average Canadian's idea of a balanced portfolio was a savings bond and a lottery ticket"). The Bank of Montreal responded by acquiring Nesbitt Thomson, Canada's fourth-largest brokerage firm, in 1987.
William Mulholland made way for a younger successor, Matthew W. Barrett, in 1987. However, the bank continued in the direction Mulholland had set for it. It grew in Canada, offering more services, and expanded across the border, mostly through its Harris Bancorp subsidiary. In 1993, the bank announced a major push to grow Harris. Harris got a new CEO that year, whose job was specifically to oversee the expansion plan. By 1993, Harris accounted for about 30 percent of Bank of Montreal's earnings. The parent company thought that figure could rise to 50 percent over the next decade. The company planned to invest some $600 million to $700 million to triple the number of Harris branches, of which there were 40 in 1993. The plan called for increasing Harris's presence in the Chicago area and in seven surrounding states. This Midwestern region by itself had a gross national product twice that of Canada as a whole. Bank of Montreal planned to become a leading bank in the area, and so make itself an integrated cross-border "truly North American" bank. The ten-year plan got off the ground quickly. In 1994, Harris acquired Suburban Bancorp Inc., headquartered in Palatine, Illinois. With the addition of Suburban's 30 offices, Harris was already over halfway to its goal of tripling its branches. The bank also moved beyond its original focus of growth in the Midwest. Harris had had a trust banking business in Florida since the early 1980s. In 1997, it moved to change its trust charter to allow it to do commercial banking in Florida in a joint venture under the name Harris Bank/Bank of Montreal. The rationale for the move was to attract the 90,000 Chicagoans and 409,000 Canadians who wintered in Florida.
Back in Canada, Bank of Montreal proposed a giant merger which would have made it Canada's largest bank. The idea was for Bank of Montreal to combine with its rival Royal Bank of Canada. At the same time, two more of Canada's leading banks, Canadian Imperial Bank of Commerce and the Toronto-Dominion Bank, also proposed merging. This would have left the two newly merged banks in control of some 70 percent of Canadian banking. Bank of Montreal argued that the consolidation would help protect Canadian consumers. The newly enlarged Canadian banks would be able to compete successfully with behemoth American banks who were increasingly encroaching on Canadian turf. If Royal and Bank of Montreal merged, the new bank would be one of the top 25 banks globally, and so it would be better able to compete worldwide. But the Canadian government balked at the deal. In December 1998, Canada's finance minister ruled that the mergers could not go through, citing "an unacceptable concentration of economic power in the hands of fewer, very large banks." Bank of Montreal chafed at the setback, yet it still found ways to increase its business, both in Canada and abroad.
Soon the two would-be merger partners, Bank of Montreal and Royal Bank of Canada, proposed a different deal. In a joint venture, they would run a credit card processing company, or so-called merchant acquirer, called Moneris Solutions Corp. Canadian law required banks to handle only one credit card. Bank of Montreal was the leading MasterCard bank, but it was not allowed to issue Visa cards. To process merchants' credit card deposits, the bank had to go through a complicated process of sorting and sending the Visa slips elsewhere. The two banks got the government go-ahead to combine their services and launched Moneris in December 2000. The company expected to process 30 percent of all Canadian credit card transactions. Its 330,000 clients made it the largest credit card processing company in Canada and number five in North America.
By 2001, Harris Bank had 140 branches and roughly $6 billion in assets. It kept up its acquisition charge, buying the First National Bank of Joliet in 2000, as well as Village Bank of Naples, Florida, and the Century Bank, in Scottsdale, Arizona. Bank of Montreal announced a new goal for its U.S. subsidiary in 2001, which was to focus on top urban markets. This meant the bank was looking for takeover targets in Texas; California; Atlanta, Georgia; and Florida, as well as in cities in the Midwest. Between 1999 and 2001, Bank of Montreal made six acquisitions in the U.S., ending 2001 with the major purchase of CSFBdirect Inc. This was a subsidiary of Credit Suisse First Boston, with a huge client base of affluent individual investors. The purchase meshed with the wealth management services offered by Bank of Montreal's Nesbitt Burns brokerage subsidiary and Harris Bank's investment services. The bank combined these operations under its Private Client Group division, which managed some $149 billion in total assets as of October 2001.
Principal Subsidiaries
Harris Bankcorp, Inc.; BMO Nesbitt Burns; Moneris Solutions Corp. (50%).
Principal Competitors
Royal Bank of Canada; Toronto-Dominion Bank; Canadian Imperial Bank of Commerce.
Further Reading
"Bank of Montreal Taps Barrett as President, Heir to Mulholland," Wall Street Journal, September 23, 1987, p. 1.
"Bank of Montreal to Begin Midwest Expansion," Wall Street Journal, June 17, 1993, p. B7.
Denison, Merrill, Canada's First Bank: A History of the Bank of Montreal, 2 vols., New York: Dodd, Mead, 1966.
Elstein, Aaron, "Canada Bars 2 Megadeals, Sees Threat to Competition," American Banker, December 15, 1998, p. 1.
Holloway, Andy, "Plastic Surgery," Canadian Business, September 17, 2001, p. 96.
Kassner, Pam, "Harris, Suburban Bancorp, Bank of Montreal Merger Agreement--A Major Step in North American Strategy," PR Newswire, April 18, 1994, p. 1.
Murphy, Patricia A., "A New Arrival from the North," Credit Card Management, September 2000, pp. 30-36.
Plunkett, Marguerite M., "Harris Starting Fla. Expansion," Palm Beach Post, December 3, 1997, p. 9B.
Reilly, Patrick, "Mapping Bank of Montreal's Expansion Plan," American Banker, November 1, 2001, p. 1.
Simon, Bernard, "For the Big Canadian Banks, Profit Is Retail and Domestic," New York Times, November 28, 2001, p. W1.
Weber, Joseph, "Why Canada Should Lighten Up on Foreign Banks," Business Week, December 7, 1998, p. 130.
— Updated by A. Woodward
