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BMO’s U.S. business contributed 38 per cent of the Canadian bank’s adjusted earnings during fiscal 2021.Aaron Vincent Elkaim/The Canadian Press

The centre of gravity at Canada’s oldest bank is shifting south – and that’s a good thing for investors.

When Darryl White became chief executive officer of Bank of Montreal back on Nov. 1, 2017, he set a new growth target for its American business.

Specifically, Mr. White pledged that BMO’s U.S. operations, which at that time generated 24 per cent of the bank’s overall profit, would increase their contribution to a third of total earnings within three to five years. To be clear, he was referring to the U.S. division’s share of annual adjusted net income, a measure of financial performance that excludes one-time items.

Although the bank’s U.S. arm first managed to exceed that target in fiscal 2019, the global economic crisis sparked by the COVID-19 pandemic could have derailed its growth trajectory. Instead, the U.S. operations only narrowly missed that goal in fiscal 2020 before it roared back in fiscal 2021.

BMO’s U.S. business, which includes personal and commercial banking, capital markets and wealth management, contributed 38 per cent of the Canadian bank’s adjusted earnings during fiscal 2021.

This business columnist isn’t prone to gushing about banks (or the executives who run them), but it’s hard not to be impressed by BMO’s turnaround south of the border – especially since other foreign banks have stumbled in the U.S. market over the past year.

France’s BNP Paribas, for instance, is mulling a sale of its U.S. division Bank of the West. That makes it the latest global bank to contemplate leaving the American retail banking market in the face of stiff competition, rising costs and a more contentious regulatory environment. (BMO has reportedly expressed some interest in acquiring it, Bloomberg reported on Thursday.)

Other global banks, including London-based HSBC Holdings, Spain’s Banco Bilbao Vizcaya Argentaria and Japan’s Mitsubishi UFJ Financial Group, have already decided to exit their respective U.S. retail banking businesses.

The bulk of BMO’s U.S. earnings are still generated by personal and commercial banking, but during an earnings call earlier this month, executives highlighted the potential for future growth in all areas of the American business.

From 2017 to 2021, the U.S. segment’s compound annual growth rate was 27.5 per cent for adjusted net income (based on U.S. dollars).

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Other financial metrics are also worth monitoring. For instance, the U.S. segment’s adjusted return on equity (ROE), which is another measure of profitability, was 15.8 per cent in fiscal 2021. (The earliest available figure for comparative purposes is 9.3 per cent adjusted ROE in fiscal 2019.)

Meanwhile, the U.S. division’s adjusted efficiency ratio, a productivity measure that reflects expense control, was 55.9 per cent for fiscal 2021. That’s a significant improvement from 70.6 per cent in fiscal 2017. (While it may sound counterintuitive, a lower number is better. Banks strive for a low figure because a high efficiency ratio signals rising costs or falling revenues.)

“Our U.S. operations are our fastest growing segment and are now generating returns and efficiency on par with the rest of the bank, with the stage set for further growth as the economy rebounds,” Mr. White wrote in a recent letter to shareholders. “In 2021, BMO’s U.S. footprint is no longer defined as the Midwest – it’s the U.S.”

BMO, which is now the eighth-largest North American bank by assets, made its first foray into the U.S. market in 1818 when it opened an agency in New York. But it wasn’t until much later that it laid the foundation for its current growth with its acquisition of Chicago-based Harris Bank in 1984.

Still, like other Canadian banks, BMO has also experienced its share of setbacks in the United States. BMO’s 2011 acquisition of Milwaukee-based Marshall & Ilsley Corp. doubled its U.S. footprint, but the integration process was messy. Not only did customer satisfaction initially take a hit, BMO spent years cleaning up M&I’s loan book.

A turnaround of the U.S. business finally took hold in 2017. And since becoming CEO, Mr. White has made it a priority to accelerate U.S. growth.

In 2021, roughly half of the U.S. unit’s revenue was generated outside its traditional Midwest footprint.

Mr. White has previously said there is no self-imposed cap on the U.S. segment’s growth or its contribution to the bank’s overall earnings mix.

BMO’s U.S. strategy is paying off, but investors are wondering if it can generate more momentum.

During the bank’s recent earnings call, financial analysts peppered executives with questions, including about the U.S. business. Their concerns include the outlook for loan growth and credit risk, especially since supply chain challenges and new variants of the coronavirus are creating uncertainty for the North American economy.

Some analysts also seemed incredulous that BMO is forecasting flat expenses in fiscal 2022, given concerns about inflation, including the potential for rising wages. Others wondered aloud if BMO was planning to cut corners with its technology investments.

Will they be proven wrong?

Mr. White is positioning BMO as a North American bank. His original three-to-five-year timeframe to achieve the U.S. segment’s growth target ends in 2022.

Those of us who geek out on banking are eager to see what Mr. White unveils for his next set of targets.

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