Bank Of Montreal Business Information, Profile, and History

History of Bank Of Montreal

Until very recently, Canada's banks were stodgy, sheltered, and highly regulated institutions, and the Bank of Montreal was among the fustiest and most traditional of them all. But two singular events in the last two decades--the arrival of an aggressive new CEO in 1975 and the deregulation of the Canadian banking industry in 1985--have shaken up this old bank and forced it to deal with the increasing complexity and internationalization of the financial world.

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% 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, so 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. And 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 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 thirteenfold. 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%, 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 proram, and the start-up costs added even more financial liability. But the Bank of Montreal was also 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 have 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 has also been 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 has also sought to internationalize under Mulholland, joining a trend in which just about every one of the world's major financial institutions has participated since the late 1960s. In 1978 it purchased a 25.1% 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. But in 1984, it finally obtained entry into the American retail market when it acquired Harris Bankcorp, the third-largest bank in Chicago, for US$547 million. As with the Bankers Trust bid, banking analysts expressed their doubts over the deal; the Bank of Montreal paid US$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.

It is perhaps too early to assess the Bank of Montreal's long-term prospects, given the fact that it has had loans outstanding in several problem areas--the crack in the oil market has not healed completely, keeping real estate prices in western Canada depressed; the Third World debt crisis has yet to resolve itself; and it bought a large securities firm just months before the 1987 stock market crash. But if anyone seems fit to guide the bank through the 1990s, it is William Mulholland, the hard-driving Yankee maverick who has openly admitted that he enjoys tweaking his establishment rivals. The Bank of Montreal has endured for more than 170 years through political instability, depression, and war; it has seen worse times than the present.

Principal Subsidiaries: Bank of Montreal Leasing Corp.; Bank of Montreal Mortgage Corp.; Bank of Montreal Realty Finance Ltd.; Bank of Montreal Realty Inc.; Bank of Montreal Asia Ltd. (Singapore); Bank of Montreal (California) (U.S.A.); Bank of Montreal International Ltd. (Bahamas); Bank of Montreal Trust Co. (U.S.A.); Bank of Montreal Trust Corp. Cayman Ltd. (Bahamas); Empresa Tecnica de Organizacao e Participacoes S.A. (Brazil); First Canadian Assessoria e Servicos Ltda. (Brazil); First Canadian Financial Corp. B.V. (Netherlands); First Canadian Financial Services (U.K.) Ltd.; Harris Bankcorp, Inc.