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Bank of Montreal

Fernando Morales/Fernando Morales/The Globe and Mail

Already the envy of the financial world, Canada's banks are heading into their best period in at least 10 years, Bill Downe says.

Over the next few years, the fundamentals of the banking business "are going to be as good as we've seen in a decade," the Bank of Montreal chief executive officer said Tuesday as BMO kicked off the industry's fourth-quarter earnings season by topping expectations.

Despite that optimistic talk, investors showed just how cautious they remain, pushing down BMO shares slightly on a day when most bank stocks also took minor dips.

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Among the reasons for the decline: BMO's results show that Canadians are continuing to struggle with their credit card debts - and they also suggest that the stellar trading profits domestic banks have posted in recent quarters are coming to an end.

Indeed, analysts questioned whether BMO's target of 10 per cent profit growth is too ambitious in the wake of the financial turmoil that has pounded financial institutions around the world and a recession that's hit consumers in their wallets.

But Mr. Downe said the exit of a number of non-bank competitors in the lending market means that the banks should be able to earn more on their loans.

"I think that the prospects for good asset growth at better margins over the next couple of years are quite realistic," he told analysts on a conference call, adding that the banking system is absorbing more than $1-trillion worth of short-term financing previously done by other lenders.

At some point, Mr. Downe said, he expects the bank will be able to release some of the money it has set aside for soured loans. That will give a future boost to earnings.

"One of the things that gives me hope is the number of private equity firms that have said they're going to [take public]previous investments in order to have capacity to make fresh investments," Mr. Downe said in an interview. That signals a return to health in financial markets, and "as soon as that happens, I think you're going to start to see across-the-board recoveries in previous provisions [for bad loans]"

The key indicator of BMO's financial cushion, its Tier 1 capital ratio, stands at 12.24 per cent, significantly above the 7 per cent minimum level currently required by Canadian regulators.

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Banks and insurers in the country are setting aside massive amounts of capital as they wait for clarity from regulators, who are in the midst of determining new requirements. Mr. Downe said he expects some response from regulators within three months.

"I'm hoping by the end of the year the U.S. banking authorities will have a sense. There are only six big banks in Canada, so I would hope by year-end we would have some clarification too," Mr. Downe said. Until that comes, he would be reluctant to make any major acquisitions, he suggested.

Mr. Downe noted that BMO did a number of takeovers this year, including a deal it announced Tuesday to acquire the North American Diners Club business from Citigroup. The purchase price on that deal was not significant, but it will double the size of BMO's corporate credit card business and give the bank nearly $1-billion (U.S.) in credit card receivables.

"I hope there will be many more acquisitions that fit in as neatly," he said. He's not restricting himself to small deals, he added. "I'm not discriminating on size. It's availability and quality that are the two driving factors."

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