BMO’s Johannson Plans Digital Upgrades to Boost Lagging Returns

(Bloomberg) -- The pandemic forced Bank of Montreal to upgrade technology in a hurry to help staff and customers cope with lockdowns. Now it's betting that digital tools can help it close its profitability gap with larger rivals.

Canada's fourth-largest bank is pressing ahead with big technology investments to cut costs and try to generate more revenue from existing customers, according to one of the bank's top executives.

The new tools include a small-business platform that can process loan approvals in 20 minutes instead of several days and secure document software so customers don't have to visit branches to sign paperwork.

They're meant to help free up bankers to focus more on advice and sales while allowing the bank to continue trimming its branch network, Erminia Johannson, BMO's head of personal and business banking for the U.S. and Canada, said in an interview.

“We're looking at how we transform our cost base as we go forward, because that is an accelerant for us to then be able to do more investment in marketing programs and in new product capabilities,” Johannson said. The bank shut 43 U.S. branches over the past two years, reducing its U.S. network by about 7.5%.

The pandemic has forced financial institutions of all kinds to reimagine themselves. After pledging to protect jobs early in the pandemic -- a promise that caused headcount at the largest U.S. banks to surge in the first nine months of 2020 -- bank executives have turned their attention again to slicing costs.

The shifts include moving jobs to different locations, allowing more staff to work from home and reducing real estate. Analysts at Royal Bank of Canada wrote last month that the U.K.'s largest banks should chop thousands of branches to cut expenses.

For Bank of Montreal, improving retail banking profitability is central to its effort to turn around its stock performance, which ranks last among Canada's five largest banks over the past year. BMO's Canadian personal and commercial business -- its largest unit -- had the second-lowest return on equity among that group in the fiscal year ended Oct. 31.

Return on equity for BMO's U.S. personal and commercial operation, which is focused on Chicago and the Midwest, was 8.3% last year, the lowest of all of its divisions, and has lagged returns at the Canadian unit for years.

That's because of several factors, including the higher relative costs of operating in the more competitive U.S. market and the writedown of acquisition-related goodwill.

Still, the U.S. division stacks up well against its rivals on efficiency. Non-interest expenses as a portion of its net income was 56% last quarter, better than the almost 60% average for large North American regional banks, according to data compiled by Bloomberg.

Deposit Growth

Leading the effort to improve those numbers will be Johannson, who in the past two years has been handed progressively larger pieces of BMO's personal and commercial banking operations to manage. She became head of U.S. personal and business banking in 2018 and added control of Canadian personal banking the following year.

She took over Canadian business banking, which handles the accounts of small and midsize companies, last March, just as Covid-19 began to spread in North America. The widespread shutdowns that followed spawned unprecedented operational challenges.

BMO was forced to rapidly equip call center employees to work from home and redeploy branch workers to handle a flood of customer calls the bank was receiving and making, Johannson said. Quick action allowed the bank to speak with thousands of customers to help them take advantage of government support programs during the crisis, she said.

The moves helped BMO's personal and commercial banking businesses in both countries post stronger profit margins in the fourth quarter than many peers did, helped by lower costs and faster deposit growth.

Now BMO is looking to build on that in the year ahead as businesses and consumers unleash some pent-up spending into the reopening economy, Johannson said.

Digital gains made during the pandemic should stick, she said. The number of active users of BMO's mobile app rose to 2 million in Canada in fourth quarter, an 8.4% increase from a year earlier. The portion of transactions in Canada conducted through digital formats, ATMs and automated phone system increased to 92% in the fourth quarter from 87.3% a year earlier.

The bank's U.S. operation showed similar trends, with active mobile users increasing 9.5% to 508,000 and self-serve transactions climbing to 76.4% from 68.3%.

Johannson says she expects to turn those numbers into revenue with new tools and products, including enhanced software for creating financial plans for customers. “I see a lot of opportunity in just growing share of wallet with existing customers,” she said.

On the client acquisition side, BMO is one of eight banks working with Google to introduce mobile-first bank accounts in the U.S. that will be available this year. Even before that program launches, it has been gathering new deposits in all 50 states, well beyond its Midwest-centric branch network.

The digital efforts are being bolstered with new products aimed at millennial consumers, a cohort in their mid-20s to late-30s who are choosing the bank they'll be with “for the rest of their lives,” Johannson said. For example, two new Visa cards offer increased rewards in categories like dining, transit and ride-sharing.

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