Bank of Montreal is making a lot of money in the capital markets business, but shareholders are soon going to want to see a lot more of that cash in the form of greenbacks instead of just loonies.
BMO has been building up its capital markets business in the U.S. in the past couple of years, taking advantage of weaker rivals to hire away talent. So far, though, the money is mostly flowing out, rather than into the firm's U.S. offices.
Last year the firm brought in Perry Hoffmeister, a former Lehman Brothers banker who joined BMO as its new head of U.S investment and corporate banking, and many others from firms such as Merrill Lynch, Royal Bank of Scotland and JPMorgan Chase. The hires range in businesses from bonds to fixed income to equities.
It's a costly endeavour. Even when bankers are desperate to make a move, they still don't come cheap by any real-world definition. Then when they do show up, even if they bring in new skills and clients, it takes a while for them to turn that into business for their new employer.
The result is that for BMO, even after all the hiring, the revenue from the U.S. isn't there. In the first half of this fiscal year, BMO's capital markets business reported $492-million of profit, only $5-million of that from the U.S.
The firm has had negative operating leverage in the U.S. for seven straight quarters. In plain English, that means revenue growth hasn't kept pace with expense growth for the past 21 months.
Tom Milroy, chief executive officer of the securities business, says that won't last.
"We see the lines going the right way," Mr. Milroy said in an interview. "You have to make the investment and revenues lag, so we're in that period now but underneath it everything is doing what we would expect it to do."
The bank is getting more advisory mandates on deals, such as its recent high-profile job of advising one of the would-be bidders for the parent company of the New York Stock Exchange. Alas, BMO won't be getting paid much on that, as the bidder had to drop its attempt.
Notwithstanding that, the firm is now ranked No. 24 in the Bloomberg global league tables for merger advisory work in the first half of this year.
Only RBC Dominion Securities was higher among Canadian firms. Before the financial crisis, BMO was closer to 60th place some years, with many more Canadian firms ahead of it.
In market share terms, BMO's business in M&A has almost doubled from pre-crisis levels.
There are other signs of progress, Mr. Milroy said. The bank revamped its equities business and now is reeling in increasing equity trading commissions in a world where over all they are declining. BMO's business in U.S. equity underwriting shows a similar trend to M&A.
"We've seen it in the backlog and the M&A deals we're doing in the U.S., in the financing activity that's under way in the equity and the fixed-income space," he said, adding: "It's not where we want it to be yet but at least the signs are there."
Thanks to more business outside Canada and a booming business at home fed by mining and energy financing and mergers, BMO finds itself in heady territory, cracking the top 25 firms globally in investment banking fees earned in the first quarter. BMO jumped five spots to finish the first quarter at No. 23, earning $160.1-million (U.S.) of fees in the quarter.
To be sure, the market shares for BMO in the U.S. are still small, but given the relative sizes of the markets in Canada and the U.S., you don't have to have a big chunk of the deal flow in the U.S. to make a big difference to a Canadian firm.
That may turn the tide of greenbacks BMO's way.
"We think that our ambitions are achievable and if anything, modest," Mr. Milroy says. "We think we can get there, and we believe we have the building blocks in place."