Bank of Montreal is betting that digital tools can help it close its profitability gap with larger rivals.

Bank trying to cut costs, generate more revenue to keep up with rivals

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 smallbusiness 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 per cent.

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 head count 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 per cent 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. Noninterest expenses as a portion of its net income was 56 per cent last quarter, better than the almost 60 per cent average for large North American regional banks, according to data compiled by Bloomberg.

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-centre 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 two million in Canada in fourth quarter, an 8.4 per cent increase from a year earlier.

The portion of transactions in Canada conducted through digital formats, ATMs and automated phone system increased to 92 per cent in the fourth quarter from 87.3 per cent a year earlier.