Filed by Bank of Montreal
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12 under the
Securities Exchange Act of 1934
Subject Company: Marshall & Ilsley Corporation
Commission File No.: 1-33488
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12 under the
Securities Exchange Act of 1934
Subject Company: Marshall & Ilsley Corporation
Commission File No.: 1-33488
This filing, which includes a transcript from the RBC Capital Markets Canadian Banks CEO
Conference, may contain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and comparable “safe harbour” provisions of applicable Canadian
legislation, including, but not limited to, statements relating to anticipated financial and
operating results, the companies’ plans, objectives, expectations and intentions, cost savings and
other statements, including words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,”
“intend,” “will,” “should,” “may,” and other similar expressions. Such statements are based upon
the current beliefs and expectations of our management and involve a number of significant risks
and uncertainties. Actual results may differ materially from the results anticipated in these
forward-looking statements. Such factors include, but are not limited to: the possibility that the
proposed transaction does not close when expected or at all because required regulatory,
shareholder or other approvals and other conditions to closing are not received or satisfied on a
timely basis or at all; the terms of the proposed transaction may need to be modified to satisfy
such approvals or conditions; the anticipated benefits from the proposed transaction such as it
being accretive to earnings, expanding our North American presence and synergies are not realized
in the time frame anticipated or at all as a result of changes in general economic and market
conditions, interest and exchange rates, monetary policy, laws and regulations (including changes
to capital requirements) and their enforcement, and the degree of competition in the geographic and
business areas in which M&I operates; the ability to promptly and effectively integrate the
businesses of M&I and BMO; reputational risks and the reaction of M&I’s customers to the
transaction; diversion of management time on merger-related issues; increased exposure to exchange
rate fluctuations; and those other factors set out on pages 29, 30, 61 and 62 of BMO’s 2010 Annual
Report. A significant amount of M&I’s business involves making loans or otherwise committing
resources to specific companies, industries or geographic areas. Unforeseen events affecting such
borrowers, industries or geographic areas could have a material adverse effect on the performance
of our integrated U.S. operations.
Additional factors that could cause BMO Financial Group’s and Marshall & Ilsley Corporation’s
results to differ materially from those described in the forward-looking statements can be found in
the 2010 Annual Report on Form 40-F for BMO Financial Group and the 2009 Annual Report on Form 10-K
of Marshall & Ilsley Corporation filed with the Securities and Exchange Commission and available at
the Securities and Exchange Commission’s Internet site (http://www.sec.gov).
In connection with the proposed merger transaction, BMO will file with the Securities and Exchange
Commission a Registration Statement on Form F-4 that will include a Proxy Statement of M&I, and a
Prospectus of Bank of Montreal, as well as other relevant documents concerning the proposed
transaction. Shareholders are urged to read the Registration Statement and the Proxy
Statement/Prospectus regarding the merger when it becomes available and any other relevant
documents filed with the SEC, as well as any amendments or supplements to
those documents, because they will contain important information. A free copy of the Proxy
Statement/Prospectus, as well as other filings containing information about BMO and M&I, may be
obtained at the SEC’s Internet site (http://www.sec.gov). You will also be able to obtain these
documents, free of charge, from BMO at www.BMO.com under the tab “About BMO — Investor Relations”
and then under the heading “Frequently Accessed Documents”, from BMO Investor Relations, Senior
Vice-President at 416-867-6656, from M&I by accessing M&I’s website at www.MICorp.com under the
tab “Investor Relations” and then under the heading “SEC Filings”, or from M&I at (414) 765-7814.
BMO and M&I and certain of their directors and executive officers may be deemed to be participants
in the solicitation of proxies from the shareholders of M&I in connection with the proposed merger.
Information about the directors and executive officers of BMO is set forth in the proxy statement
for BMO’s 2010 annual meeting of shareholders, as filed with the SEC on Form 6-K on February 26,
2010. Information about the directors and executive officers of M&I is set forth in the proxy
statement for M&I’s 2010 annual meeting of shareholders, as filed with the SEC on a Schedule 14A on
March 12, 2010. Additional information regarding the interests of those participants and other
persons who may be deemed participants in the transaction may be obtained by reading the Proxy
Statement/Prospectus regarding the proposed merger when it becomes available. Free copies of this
document may be obtained as described in the preceding paragraph.
RBC Capital Markets — Canadian Banks CEO Conference
January 11, 2011
Hosted by: Andre Hardy — RBC Capital Markets — Analyst
Guest Speaker: Bill Downe — Bank of Montreal — President, CEO
Guest Speaker: Bill Downe — Bank of Montreal — President, CEO
Cautionary Statement Regarding Forward-Looking Information
Bank of Montreal’s public communications often include written or oral forward-looking statements.
Statements of this type are included in this document, and may be included in other filings with
Canadian securities regulators or the U.S. Securities and Exchange Commission, or in other
communications. All such statements are made pursuant to the “safe harbour” provisions of, and are
intended to be forward-looking statements under, the United States Private Securities Litigation
Reform Act of 1995 and any applicable Canadian securities legislation. Forward-looking statements
may involve, but are not limited to, statements with respect to the acquisition of M&I, plans for
the acquired business and the financial impact of the acquisition and are typically identified by
words such as “believe”, “expect”, “anticipate”, “intend”, “estimate”, “plan”, “will”, “should”,
“may”, “could” and other similar expressions.
By their nature, forward-looking statements require us to make assumptions and are subject to
inherent risks and uncertainties. Such statements are based upon the current beliefs and
expectations of our management and involve a number of significant risks and uncertainties. There
is significant risk that predictions, forecasts, conclusions or projections will not prove to be
accurate, that our assumptions may not be correct and that actual results may differ materially
from such predictions, forecasts, conclusions or projections. We caution readers of this document
not to place undue reliance on our forward-looking statements as a number of factors could cause
actual future results, conditions, actions or events to differ materially from the targets,
expectations, estimates or intentions expressed in the forward-looking statements.
Such factors include, but are not limited to: the possibility that the proposed transaction does
not close when expected or at all because required regulatory, shareholder or other approvals and
other conditions to closing are not received or satisfied on a timely basis or at all; the terms of
the proposed transaction may need to be modified to satisfy such approvals or conditions; the
anticipated benefits from the proposed transaction such as it being accretive to earnings,
expanding our North American presence and synergies are not realized in the time frame anticipated
or at all as a result of changes in general economic and market conditions, interest and exchange
rates, monetary policy, laws and regulations (including changes to capital requirements) and their
enforcement, and the degree of competition in the geographic and business areas in which M&I
operates; the ability to promptly and effectively integrate the businesses of M&I and BMO;
reputational risks and the reaction of M&I’s customers to the transaction; diversion of management
time on merger-related issues; increased exposure to exchange rate fluctuations; and those other
factors set out on pages 29, 30, 61 and 62 of BMO’s 2010 Annual Report. A significant amount of
M&I’s business involves making loans or otherwise committing resources to specific companies,
industries or geographic areas. Unforeseen events affecting such borrowers, industries or
geographic areas could have a material adverse effect on the performance of our integrated U.S.
operations.
In calculating certain pro-forma impacts of the transaction and additional common equity required
on our Tier 1 capital ratio and common equity ratio we have assumed our interpretation of the
proposed rules announced by the Basel Committee on Banking Supervision (BCBS) prior to December 16
and our models used to assess those requirements are consistent with the final requirements that
will be promulgated by BCBS and the Office of the Superintendent of Financial Institutions Canada
(OSFI). We have also assumed that the proposed changes affecting capital deductions, risk-weighted
assets, the regulatory capital treatment for non-common share capital instruments (i.e.
grandfathered capital instruments) and the minimum regulatory capital ratios are adopted as
proposed by BCBS and OSFI. We also assumed that existing capital instruments that are non-Basel III
compliant but are Basel II compliant can be fully included in such estimate. Our estimates of
expected RWA and capital deductions for M&I at closing are based on anticipated balances
outstanding and credit quality at closing and our estimate of their fair value. It also reflected
our assessment of goodwill, intangibles and deferred tax asset balances that would arise at
closing. The full impact of the Basel III proposals has been quantified based on our financial and
risk positions at October 31, 2010 or as close to October 31, 2010 as was practical. The Basel
rules are not yet finalized and are subject to change, which may impact the results of our
analysis.
Assumptions about the performance of the Canadian and U.S. economies in 2011 and how that will
affect our businesses were material factors we considered when setting our strategic priorities and
objectives, and our outlook for our businesses. Key assumptions included that the Canadian and U.S.
economies will grow moderately in 2011, that interest rates will remain low and that our
assumptions regarding regulatory reforms will be consistent with the implementation of such
reforms. We also assumed that housing markets will strengthen in Canada and the United States. We
assumed that conditions in capital markets will improve somewhat and that the Canadian dollar will
strengthen modestly relative to the U.S. dollar. In determining our expectations for economic
growth, both broadly and in the financial services sector, we primarily consider historical
economic data provided by the Canadian and U.S. governments and their
agencies. Assumptions about current and expected capital requirements, M&I’s revenues and expenses, potential
for earnings growth as well as costs associated with the transaction, and expected synergies were
material factors we considered in estimating the internal rate of return to BMO and our estimate of
the acquired business being accretive to BMO’s earnings in 2013.
In setting out our estimated credit mark, we considered our analysis of the M&I portfolio, our
assumptions regarding consumer behaviour, future real estate market conditions and general economic
conditions.
Assumptions about our integration plan, the efficiency and duration of integration and the
alignment of organizational responsibilities were material factors we considered in estimating
transaction and integration costs.
Assumptions about potential success of our focus on commercial banking and sector growth in the
Canadian economy were material factors in estimating our opportunities for growth in commercial
loans and commercial deposits in Canada
Assumptions about current and projected productivity of recruited professionals, regional growth in
the U.S. economy and ongoing client relationships were material factors in estimating potential
long-term growth in our U.S. capital markets business.
BMO does not undertake to update any forward-looking statement, whether written or oral, that may
be made, from time to time, by the organization or on its behalf, except as required by law.
Non-GAAP Measures
Bank of Montreal uses both GAAP and non-GAAP measures to assess performance. Readers are cautioned
that earnings and other measures adjusted to a basis other than GAAP do not have standardized
meanings under GAAP and are unlikely to be comparable to similar measures used by other companies.
Reconciliations of GAAP to non-GAAP measures as well as the rationale for their use can be found in
Bank of Montreal’s Fourth Quarter 2010 Earnings Release and Bank of Montreal’s 2010 Management’s
Discussion and Analysis, all of which are available on our website at
www.bmo.com/investorrelations.
Examples of non-GAAP amounts or measures include: cash earnings per share and cash productivity;
revenue and other measures presented on a taxable equivalent basis (teb); amounts presented net of
applicable taxes, earnings which exclude the impact of provision for credit losses and taxes, and
core earnings which exclude non recurring items such as acquisition integration costs.
Bank of Montreal provides supplemental information on combined business segments to facilitate
comparisons to peers.
Additional Information for Stockholders
In connection with the proposed merger transaction, BMO will file with the Securities and Exchange
Commission a Registration Statement on Form F-4 that will include a Proxy Statement of M&I, and a
Prospectus of Bank of Montreal, as well as other relevant documents concerning the proposed
transaction. Shareholders are urged to read the Registration Statement and the Proxy
Statement/Prospectus regarding the merger when it becomes available and any other relevant
documents filed with the SEC, as well as any amendments or supplements to those documents, because
they will contain important information. A free copy of the Proxy Statement/Prospectus, as well as
other filings containing information about BMO and M&I, may be obtained at the SEC’s Internet site
(http://www.sec.gov). You will also be able to obtain these documents, free of charge, from BMO at
www.bmo.com under the tab “About BMO — Investor Relations” and then under the heading “Frequently
Accessed Documents” or from M&I by accessing M&I’s website at www.MICorp.com under the tab
“Investor Relations” and then under the heading “SEC Filings.”
BMO and M&I and certain of their directors and executive officers may be deemed to be participants
in the solicitation of proxies from the shareholders of M&I in connection with the proposed merger.
Information about the directors and executive officers of BMO is set forth in the proxy statement
for BMO’s 2010 annual meeting of shareholders, as filed with the SEC on Form 6-K on February 26,
2010. Information about the directors and executive officers of M&I is set forth in the proxy
statement for M&I’s 2010 annual meeting of shareholders, as filed with the SEC on a Schedule 14A on
March 12, 2010. Additional information regarding the interests of those participants and other
persons who may be deemed participants in the transaction may be obtained by reading the Proxy
Statement/Prospectus regarding the proposed merger when it becomes available. Free copies of this
document may be obtained as described in the preceding paragraph.
I’m very happy to have Bill Downe, President and CEO of BMO Financial Group. Bill started at the
bank in 1983 and has worked in many different parts of the bank, both in the U.S. and Canada. Bill
has been in his current position since 2007. Outside of his role with BMO, Bill is the only
Canadian member of International Business Leaders Advisory Council of the Mayor of Beijing. Bill
also spends time in the community including sitting on the Board of St. Michael’s Hospital
Foundation here in Toronto.
Bill, on behalf of everyone in the room, thank you for participating in this event. Before we
start, I’ve been asked to remind investors that your comments today may contain forward-looking
statements and that listeners should consult each companies, including the BMO’s disclosures filed
with securities exchanges and on BMO’s website for further detail. So before I start with
questions, are there key messages that you want to make sure you leave us with this morning, Bill.
Okay. Thanks very much, Andre, and I’ll reiterate the forward-looking caution that you gave and
take everyone back to the website for specifics, if you would please. Well, I’m delighted to be
here. We’ve been fully occupied in the last six or seven weeks.
We announced our fiscal year-end numbers on December 7th and moved very quickly into a process that
led to the December 17th announcement that we are going to acquire M&I. And I appreciate how much
pressure that put on investors at the end of the year quickly to respond to that. However, we’ve
been able to use the time since the announcement to accomplish a great deal. So I think, the fact
that it happened over the break really did create an opportunity for us to get some things done. I
think the acquisition came in at an extremely opportune time right after the year-end. We had
completed a very strong year, all of our businesses were running well.
I think the clarification we are able to provide around capital in the MD&A for me was very
reassuring, to be able to go through the process of saying,what the impact of the 2009 [sic] rules
will be, and take it back to a pro forma of 2010, so that we were able to approach the acquisition
with confidence that our Tier 1 ratio, at October 31st was 13.45%. But more importantly, we’ve
done the calculation of the Basel II ratio at 10.26%. And then the Basel III calculation estimating
the capital at 7.8%, which meant that when we did the analysis of what a pro forma would look like
with larger U.S. P&C business and we knew where we would stand.
And I think that the second reason why the timing was particularly good is, what’s allowed us to do
is make a very significant change in our U.S. Personal and Commercial Bank, more than doubling the
branch footprint, significant increase in the breath of assets. But more importantly, if you look
geographically, we have a number two market position in Chicago. We now have a number one market
position in Wisconsin and we’re top five in a number of other states, with a very significant
presence in cities like St. Louis, we’ve really bulked up in Indianapolis and in Minneapolis. So
the bank itself has a much bigger footprint, there was no branch overlap, no distribution overlap.
But some very complementary businesses, and a very significant increase in assets under management.
So it’s good for our wealth management business, they have a strong private bank and that’s going
to be very complementary too.
I think the second reason that I alluded to was the performance of the bank in 2010. Our Personal
and Commercial business has really come to a point of fruition. We’ve been on a five year journey
of re-establishing our competitive position in the market. There’s a lot of innovation in the
pipeline, I think you’ve seen some good product introduction, it really ties into our brand in the
last couple of months. And this week with the release of Money Logic, which I’m happy to talk a
little bit more about a continuous introduction of new products, wealth management business is
doing well, capital markets really returned to fundamentals where the debt and equity business and
the M&A business is tied back to real client activity.
So we’re happy there. The last point that I would make, Andre is that we have made some management
changes, coincident with the announcement really, just after the end of the year. So that Russ
Robertson who has been our Chief Financial Officer for the last three years is going to take on a
full-time role to oversee the integration of Harris Bank and M&I and Tom Flynn who has been
enormously capable at Chief Risk Officer has been moving to the CFO’s job.
Tom was responsible for the work, leading up to the announcement of the acquisition and he is going
to continue to lead the team to closing and Russ will take over on integration. And as I said,
we’ve used the last couple of weeks to enormous value. The teams are all in place, both the closing
team and the integration teams, staff from both banks and from the parent, so we’re well under way.
I’ve had the opportunity to spend three, four days in the market and met almost 2,000 of the
employees of M&I.
And just reflecting on the integration, we’ve made about $2.2 billion of acquisition for last five
years. They’ve made about 1.8 billion of acquisitions in the last five years. So together, we have
the experience of an aggregated business about the same size as the 4.1 we’re paying for M&I.
And with that, I’d be happy to entertain your questions.
Thank you. And let’s stay with M&I, because obviously that’s where the investor interest right now
is the highest in the case of BMO. The expense synergies are lower than we see in many U.S.
regional banking deals. Is that a function of the branch overlap being a lower, or a dose of
conservatism on the BMO side or is there something else?
I think initially, the synergies that we’ve put up for around 250 million or about 16%. And as you
say, we see a lot of acquisitions where in advance the announced synergies are 21, 22, 23%. I think
it’s a prudent level. There is no branch overlap. I’m not a big fan of attributing synergy to
overlap, because when you have two branches with different brands and you close one, your ability
to retain those accounts is not as high as many people think. So I think there’s a virtue in zero
branch overlap personally. And we’ve been cautious with respect to the north-south synergies. But I
think when you step back and look at the bank’s 900 branches in Canada; this will give us 700
branches in the United States. What we really haven’t explored is the extent to which we can get
larger synergies from the total institution and I think that’s probably a couple of years out. But
I think there is some opportunity for us to do some more work there.
You talked about the capital ratios and the impact of the transaction. The $800 million
pre-announced share issue, why did the bank feel it needed to do that? And even if you didn’t do
it, the bank would still have a fairly high capital ratio. So why do you think it’s needed?
Well, I think that that level was indicated as a prudent level upfront. We’re obviously going to
issue equity prior to closing and I think there is some more things that we’ll work through between
now and closing. But I think the logic of putting the number there that we did is the same logic as
going through the exercise of taking the 2019 Basel standards back to today, that you have to know
where you stand. I think flexibility comes from having assurance that your capital levels in
advance are going to be in very good shape. You noticed, I hope this morning, that we announced an
acquisition we’ve been working on for very considerable amount of time, Lloyd George Asset
Management, a Hong Kong-based firm, that is highly complementary to our global asset management
business. And the ability to continue to take advantage of those opportunities I think is part of
the logic that underlies it.
I guess what you’re saying is you’re targeting a certain ratio and you needed to raise $800 million
or you need to raise $800 million to get there. Are you hoping there might be other things you can
do to have a smaller share issue between...
Yes. We’re going to be very diligent up to the point of closing of continuing to review all of the
elements that are going to contribute to what the organization looks like at the end. I think as an
investor what I would take the assurance is that we’ll set the capital level at a place that gives
us confidence that we can continue to demonstrate by 2013 that we’re there on the 2019 numbers and
that’s consistent with I think the global supervisor is saying that as soon as possible banks ought
to be at that level.
And quite a few investors are taken back by the 20% cumulative loss marked on the portfolio. Does
that reflect the fact that loans need to be mark-to-market at close where perhaps the ultimate
losses won’t be as bad as the mark, or it’s more a question of time which is over the next three
years that’s what losses will be?
I think there are two contributing factors. They’ve taken very significant provisions against their
loan portfolio. They’ve done a very effective job of shredding non-performing assets, so they’ve
done a good job of liquidating but they still have a significant concentration on commercial real
estate. I think it’s just north of 40% of the book. And as you know at BMO, we run much lower
concentrations of real estate. 15% will be a nice level to be at. So I think we’re taking a —
we’re taking a little bit of a cautious view with respect to that commercial real estate. A big
portion of the difficulties that M&I had was in Florida and Arizona and the characteristics are
different than the Midwest. And by putting those provisions for that marketplace, I think we are
reflecting the current market. And to the extent that the current market improves, we’ll be able to
liquidate assets a little more quickly.
And we do have a lot of experience in workout. One of the things that has distinguished BMO over
the years is that we’ve kept up a large group of professional workout people in tact. They do
other things in the bright part of the cycle. But Scott Purdy who has been in our U.S. Workout
group for 25 years has handled all of the loan collection and workout for capital markets, now has
a clean book on the capital market side and he’s going to be able to devote a lot of attention to
this workout book.
So I think when you’re able to put a really prudent mark on a book, separate it with separate
management on it, then you almost look at that as a third business and we’re going to go after
that.
So when we now look at the combined entity, so let’s forget the parts, but obviously the commercial
real estate book will shrink. What’s the upside on the rest of the book? I mean the Midwest is not
a fast growing area. Obviously the areas where the commercial real estate was, there’s not going to
be a lot of growth going forward. How fast do you think the business can grow in the next two,
three, four years?
Well, it comes back to your confidence in economic growth, and we think that positive GDP growth,
real GDP growth of 3% is a very constructive environment, particularly when you’re looking at a
business led recovery. M&I’s footprint is together with ours now, covers the entire Midwest with a
very significant market position. They have a good history with C&I commercial lending, and as do
we, and we’re starting to see the beginning of the investment cycle. So if the U.S. economy growth,
let’s say at 3% in 2011 and that’s the number that we’re officially looking at, we’ve upgraded a
little bit in the last month or so, and you believe in
a business led recovery. And then you look at our market position in a number of the major cities
where there are big companies that are global, midsize companies that are global and there emerging
companies that are global. I think there is going to be a real opportunity for us to participate in
that market.
Last week, I had a couple of days in the market. I was in Minneapolis with the management team and
then met with close to 300 of the employees. I did the same thing in Milwaukee. And I was in
Indianapolis. I think as I said over the course of a week, I saw close to 2,000 employees and I was
very impressed with the professionalism that focuses on the commercial marketplace. The depth of
their customer relationships and it’s very interesting. M&I is a bank that was founded in the
1860s. Their brand is very strong in the market. Many of their commercial customers stuck with them
in what was apparently a very difficult situation. And I think we’re going to see some positive
effects of the combination relatively quickly.
Speaking of C&I or business loan growth, when you look at your various portfolios whether it’s the
corporate, the Canadian commercial or the U.S. commercial, I mean that’s the bank’s bread and
butter. What are you seeing from a loan growth perspective? Are we finally seeing the trough with
some demand picking up?
Well, in Canada, and I think obviously that’s where there is a tremendous amount of impact on the
bank. We do have a very visible and strong commercial banking presence, 20% share. And Frank and
his team have been concentrating on broadening the base of customer activity, so that we’ve seen
extremely strong commercial deposit growth. And that’s primarily new customers who are
non-borrowing customers. I think some of those customers are going to start to come back into the
part of the cycle where they’re going to be investing. And if you look at Canadian business, in
order for a Canadian business to prosper, we’re going to have to see investment and productivity
and we’re going to have to see more global marketing and sales. And in that regard, I think there
is a quite significant opportunity for us to see good commercial loan growth and good commercial
deposit growth in Canada and we’re positioned to benefit from that. U.S., I think it just ties in
with everything I’ve said.
On the Canadian side, can the turnaround in loan growth from negative to potentially quite
positive, could that be enough to offset the slowdown in retail loan growth or personal loan growth
and mortgage loan growth?
Yes. My own view and I’ve said this before is that I think the potential for commercial growth to
offset what we hope is a plateauing of consumer debt for some period of time, are to keep
everything in balance. The consumer needs to, I think needs to consolidate a little bit. We have
seen a moderation in consumer loan growth and we’ve also seen a moderation in housing market, which
I think is really a healthy thing. But if you look at the message that we’re putting in the market
around the consumer, it’s also a very explicit that we want to help consumers manage through an
entire life cycle. So our product introductions are actually addressing things like controlling,
spending and that’s where Money Logic ties right in. It goes right to the front end. If you want to
improve your balance sheet, you have to control the rate of spend and by providing products and
information that allows people to do a better job, it starts a virtuous cycle that then says
they’re going to grow their savings. We’re confident that that the product offering we have is
helping to borrow smartly.
And once again, I will go to the whole debate about 35-year amortization mortgages or 30. We’ve
introduced products to push people or encourage people to go to the 25-year mortgage where they can
build equity up in their home more quickly. The debate around whether central mortgage ought to be
discouraging longer amortization mortgages, I think misses the point, if we have a relationship
with our customers, we are to be guiding them into shorter amortization.
So, Frank and his team are putting a fair amount of effort into the front-line to try to encourage
customers who are able to move into a shorter amortization period to get into a shorter
amortization period. I think we’ll see fewer 35-year mortgages written as a consequence and fewer
30s and we’ll get more into the 25-year. So I think there’s two things, commercial offsets personal
and we’re changing the mix of offerings on the personal side. And I wouldn’t underestimate the
consequence of better control over spending, higher rates of saving and translates into more
investing. And in that regard, I think we’re very well positioned.
Right. You talked about the rate of savings, but I’m thinking of operating expenses. So it’s not
quite what you said but I’ll take you to operating expenses. Frank has mentioned some investments
are needed to be made still. Revenue growth perhaps slows in upcoming years, although you’re saying
commercial might offset more than we think. Do you still expect the bank to maintain its track
record of generating positive operating leverage in upcoming years or will that be more difficult?
Well, we moderated the target for operating leverage in the medium-term at the end of 2010, simply
because we’ve gained confidence in our ability to invest and grow revenue. Our revenues in 2010
grew a little bit more than 10% in the year. It might moderate a little bit going into the next
couple of years, but we’re able to track investment spend into the revenue line much more
effectively than we used to be able to. We had some good performances in 2010. But in the latter
half of the year, we were spending more and that’s shown up in the product introduction and we’re
going to continue to invest heavily in online. It ties in with our belief that it’s cost-effective
but also I think it speaks to itself, the ability to self-control on the part of the consumer.
So in Personal and Commercial Canada, we’ve been able to continue to spend because we’ve been able
to grow our revenue and the spending takes two forms. Some of it’s in systems, which really
supports product introduction, and the other is in front line sales force as you know we’ve been
building up our mortgage specialist sales force and we’re adding to our investment specialist sales
force. So that really ties into those other two themes. In the other businesses, I think that we
will be able to have a good relationship between expense and revenues, so the 1.5% target is one
that I’d like to adhere to through the medium-term. One of the roles that Russ Robertson is going
to play in addition to the integration of the acquisition is looking at north-south integration.
He’s been extremely effective in identifying areas for cost savings in the last couple of years and
he pretty much has the license to kill on that one. He is going to continue to look for excess
expense.
You talked about the growth of the mortgage specialist network. There’s been distortion on both
your margins positively and your loan growth negatively from getting out of the mortgage broker
channel. As you look at the next few years, is most of that behind or do you still expect a
positive impact on margins and negative impact on loan growth of running off that book?
Well, I hope we’re past the point that we achieved escape velocity on the replacement. We’re still
building mortgage specialists, and of course, there’s going to be the burden of added expansion
each time you deploy a new specialist. But from my perspective, we’re seeing good growth now. What
was really offsetting the new mortgage volume coming out of our own specialist sales force, is the
runoff of the broker channel. And I don’t have to remind you that the margins in the mortgages you
originate in the bank are higher than the ones in the broker channel. So I think that will
maintain, if you like, the NIM. But we will be happy to have the volume growth now at the current
mix and current spread.
And what about the whole pricing environment? Loan losses are coming down in the Canadian system.
Volume growth has been good. It might slow on a retail front. Does that incent a bank to be more
aggressive on pricing?
Well, there is no doubt in cases where you have a lack of clarity in brand. Weak product
introduction or a sales force that doesn’t get what your strategy is that you may have to compete
on the basis of price. Frank has, I think, done an exceptional job of communicating to the sales
force that you can communicate on the basis of value and that’s persuasive to the customer as the
sticker on price. You can also do things with the nature of product and the 25-year amortization
mortgage, five-year term for new homebuyers, there’s a case where we recognize it for a first time
homebuyer that desire to be able to refinance quickly is very low that what they really want is to
build the equity they have in their home at confidence that if it’s their first home, they have no
issues around refinancing. And while that appeared to be a product that was competing on price that
actually represented good value to us and it drove good value in other products.
So I think you have to really understand and have to be carefully prepared in the launching of a
product, understand what the value proposition is, supported with good marketing. And in that
regard I’m not that concerned that price competition is going to be eroding margins for us. I do
think it may be an issue if you don’t have the full package.
You mentioned earlier again still on loan growth and the bank encouraging consumers to go to
shorter amortization periods. Do you think the government will do more on that front or the moves
we saw in April are what we’re going to see for a while?
I think the moves in April were intelligent. If you see a good continued pattern of moderation in
house prices, if you see the total debt service ratio plateau, if you start to see a decline, then
the government will have done exactly what I think it hoped to do. Which was to draw attention to
an issue, focus consumers minds on it, get a response from the banking sector which we’ve been very
quick to respond to, and then it’s not necessary. Because there are still circumstances where the
logic behind a 35-year amortization is very sound. So to discontinue the product, from my
perspective, might not be necessary. Banks have to use good discretion in how that product is
deployed.
I go back to the capital, which we talked about a lot, as you talked about M&I, the bank has a
higher payout ratio than its peers. Is that something you are comfortable with as a long-term
payout ratio or perhaps as earnings grow the payout ratio might or the target might come down
somewhat?
Yes. Well, there are two issues. The one is the absolute payout ratio and the other is the target.
The payout ratio, we finished the year, I think just under 60. Our target is 45 to 55. I’m not sure
that meeting that target will be necessary. I think that we’ve always said that the actual dividend
is going to reflect earnings growth. We believe in growing the dividend over time.
I’d like to be comfortably in the 45 to 55 range that gives you a little more flexibility. But the
difference between the target, I’m not sure is that material. The yield on the shares now it’s
still extremely attractive. And for investors who like dividends, BMO shares currently represent
great value.
Talking about credit a little bit, do you feel that investors have moved on too fast? I mean. It’s
amazing how few questions I’m asking you and investors are asking your view?
In Canada, there has been reasonably significant increase in the provisioning from the portfolios
and I think it’s going to moderate. So I’m not as concerned about that as I might have been six
months ago. Six months ago I thought the Canadian consumer had quite enough debt. But I think that
moderation is taking place.
In the U.S., it’s an extended period to reconcile the imbalance in the housing market, and that’s
simply what the issue is. I think that the investor-owned and owner occupied real estate,
commercial real estate market is going to fare better than what we thought a year ago, and the
provisioning there I think will start to moderate. The housing market is much more problematic,
because you still have a very low level of housing starts but the buyers are sitting on the
sideline because they believe that prices could get lower.
As soon as you have a season and I define a season as February, March, April in the housing market
where prices start to tick up a little bit, then I think you’ll see buyers come in but that might
not happen in 2011. We could see a stronger housing market this spring, but if it’s delayed in
2012, that will be consistent with a much more extended period that work through the mortgage
backlog. And so I guess what I would say in that regard is it doesn’t look to me as though
investors are looking for a big up tick and they resolve themselves to the impaired balances coming
down slowly. That’s pretty consistent with my own view.
When you look out to 2012-13, are you looking at normal loan losses, trough loan losses or still
elevated as the housing issues and commercial real estate issues work themselves out in the U.S.?
Well, we push expected losses into the disclosure around individual businesses, and you will see
that our expected loss number for this year is pretty close to a normal level, it is sort of the
mid point of what you’d expect in the cycle. So I think your best guide is what that expected loss
number is and we just do quarters as you see it. But we’re pretty much right there in the middle in
terms of the yield.
We haven’t talked about capital markets yet. How big would you like that business to be as a
proportion of earnings? I’d like to start with that question.
Well, in the past where the balance has been good, it’s been around the third of the bank, 30% to
35% of the bank. We’re a little bit above that now, but just a very small amount. And that’s down
quite considerably in the last three years as we worked out some of the loan portfolios. The impact
of combining M&I’s balance sheet, Personal and Commercial with the banks will be further moderation
in the concentration of capital markets.
I’m more interested in the quality of the earnings in capital markets then in the absolute
proportion. To the extent that the earnings come from clients where if theres an issuer or
investor, I can speak directly to that
client about their relationship with us. The value added is if they’re an investor, why they bring
their order flow to us. If they’re an issuer, why are we their advisor. Then the quality is very
high and I think that there is a direct connection between our intellectual capital and the
earnings that we have. When you get into an environment where there is little capital formation and
the market is starting to back up and your revenues are more weighted to trading without the
quality of investment and corporate banking earnings there, then I think we have a question mark.
That’s what we saw two or three years ago, that’s definitely what we saw in 2006 and 2007 when we
came off the accelerator and as you can see the revenue contribution and the net income
contribution in 2009 and 2010 was really moderated. A little bit of a pick up in revenue coming
now. The pipeline I said, last quarter was good and in league tables we posted very well in
Canada.
In the U.S., I think that we’re also going to see a pick up in what I would consider the real
client related business with capital formation. We’re in a much better position in the U.S. today
than we were five years ago and our ability to lead Debt & Underwriting, our M&A business was
growing really nicely until 2007. In the U.S., it went into a bit of a stall, but the growth has
picked up in the last few months and I am confident that that business will go back to contributing
about 50% of our capital markets earnings overall. So I’ve taken a little bit of path around. The
bank is growing, the other parts of the bank are growing. Capital markets can now grow and stay
within that 30 to 35% envelope.
So you talked about the U.S. getting back to 50%, I mean that will be a pretty big lift in its
earnings contribution relative to recent quarters. What will drive that? Is it just increased
activity or is it...
Well, the focus on clients has improved. We were able to recruit very heavily in 2009 and 2010 into
the key business segments where we’re very deep in terms of industry knowledge. So the mining
business, which you know is a global business for us, very strong and continuing to perform
strongly. And I think as long as we have a positive commodity cycle, the mining business will
continue to grow. The oil and gas business which for 30 years has been a strong contributor to the
bank, I’m quite positive with respect to the growth opportunities there. The Food and Ag. business,
there is a global boom underway. It is interesting we’re the number two Ag. lender in Canada but
very close to being the number one. In the U.S., we have a very visible food and agriculture
business, but not so much in the farming cycle. If you think about the history of Harris Bank, it
was an urban bank. But the agricultural business of M&I looks so similar to our Canadian
agricultural business. We’re going to get a big lift there in food and agriculture. That’s another
area of concentration. And we have great talent now in each one of the principal market segments
that we cover in the U.S. That makes us much more relevant to clients.
So I’m expecting that the advisory revenue is going to pickup. League table positions will improve.
We’ve added a lot of very high-quality analysts in the U.S., so the research is much stronger. I
think for our investment bankers is almost an ideal state in the US. Underlying core capability
dramatically strengthened a much bigger footprint in the Midwest, relevant presence in some cities
that are two to three million in population where they were only visitors in the past. All those
factors would contribute to it and we have a good leader in the U.S. Perry Hoffmeister, now running
the U.S. investment bank extremely confident. And the relationship between commercial banking and
investment banking is very strong because it’s effective that we have people who have worked in
both areas. So it’s an ideal state if you can make a living in investment banking in all
circumstances, you will never find a better circumstance.
The bank has made quite a few investments in Asia especially China and Hong Kong. Are those going
to matter for the people in this room in the next five years or really this is planting the seed
for 15 years down the road?
No, it will matter within the next five years. We have reached a point in China and it’s China
specific as much as it is BMO specific where you can earn good returns and you can grow revenues
working with partners where the belief is that the business is going to be a long-term proposition
and my reflection is that we’ve made our first investment in Fullgoal shortly after 1999 and that
business has built up very significantly. It’s paid us very well over time as well. The dividend
flow from the business has been good and we don’t really look at the capital appreciation, the
value of the firm, but the value of the firm is up. I think what’s striking about the opportunities
in China, is they really reflect an opening up of that economy. The announcement of Lloyd George
this morning for me is the timing is just about perfect because it gives us on the ground
investment management capability.
In Hong Kong, we have expanded our private bank in Hong Kong in the last year. We have the
portfolio management and asset management capability. Our residence is extremely important. The
high net worth Chinese investor is moving capital from the Mainland to Hong Kong and then Hong Kong
to North America and Europe in search of investment returns and this puts us exactly where we want
to be in that pipeline. The Hong Kong business like the London business reports to Barry McInerney
in Chicago and when you put it all together, we had been running asset management in little silos.
So we had $20 billion here and $30 billion there, we’re now prior to either of these acquisitions
about $65 billion of AUM, if M&I adds $40 Lloyd George added $6, and its marketed as a global firm
now. We have a great deal more weight and that allows us on the consulting side to be more
relevant. Much more importantly we have the breadth of product mix between the emerging markets
platform. We have in London this new platform, in Hong Kong and also in India, which there is
about something less than 20% of the assets also in India gives us a global offering that I’m very
confident.
The people are terrific I’ve met with the leader of the firm, had extensive discussions with them,
I think it’s going to be another very strong combination. We’re opening an office in Abu Dhabi this
month that ties back into these businesses. And, so I think you’ll see both Asia as a growing
contributor in the asset management businesses, a growing contributor within the timeframe that you
said that would be relevant for the people in this room to be important to the bank.
And we’re almost out of time but I do want to ask about the state government in Illinois and the
financial difficulties that it faces. How do you see that getting resolved and ultimately what’s
impact on the Illinois economy and BMO?
The state government is going to require backbone in order to resolve the issue. The state has a,
has had a pattern of being relatively easy with cost escalation, with wage settlements, with
pension obligations and hasn’t been very aggressive on the revenue side. The state income tax rate
is quite favourable relative to the rest of the country. So they have some latitude. The new
governor is going to have to have backbone, there is going to be a new Mayor in Chicago, Mayor
Daley has worked very hard to reach sensible accommodations with the unions and has not made as
much progress as he would like. But I think the combination of a new Mayor, the urgency of the
situation, a Governor in Springfield with some backbone and some flexibility I think it will be
fine. The exposure for us is very small, our exposure to Illinois is general obligation bonds of
municipalities, very little direct if any exposure to the state itself. So although we have a
growing muni bond business in a good structuring business, we don’t have credit concerns there.
The state itself, I think will be fine. There will be some pain for the residents, for the
taxpayer. There will be some pain for the unions. But it’s a process that’s underway. It started if
necessary. The Residents of State of Illinois know full well, what has to happen. So I don’t think
it will be a drag on the local economy.
Thank you. Well, thank you very much.
Thank you very much.