According to Bloomberg, the Bank of Montreal (BMO) is considering the possibility of selling part of its international asset management business. While there is no certainty at this point, the bank has launched a study that could lead it to seek a buyer for its asset management operations outside of Canada. The objective seems clear: to focus on its domestic clients. But is that the only reason?
As with most Canadian banks, the Bank of Montreal’s core banking operations have been heavily impacted by Covid-19. Because of its high exposure to commercial loans, many fears have been raised about the bank’s possible difficulty in meeting its payments. Its income from interest fell to $5.5 billion in the third quarter, down from $6.7 billion last year. Nevertheless, the pillar of the Canadian banking industry was able to hold up well thanks to the strong performance of its capital markets unit, which saw a 36 per cent increase in revenue over the previous year. BMO posted a return on equity (ROE) of 9.2% and a profit margin of 17.9%. So why are they looking to cut loose the international operations?
Asset management: a less profitable business for banking
BMO Global Asset Management is the principal holding company for the bank’s asset management operations in Europe, Africa and the Middle East. It has offices in 14 countries, with 1,200 employees and more than US$273 billion in assets under management. In 2014, the company significantly strengthened its international presence with the acquisition of F&C Asset Management for US$1.2 billion. Now however, BMO is considering divesting its investment management division, after years of good and loyal service.
Like Société Générale or Wells Fargo & Co, more and more banks are starting to withdraw from this sphere of activity. The fierce competition over fees and the shift to passive management have been significant trends in the fund industry. However, the larger players are maintaining their market share. Morgan Stanley has plunged squarely into the industry, buying Eaton Vance Corp. for a handsome $7 billion.
Prolonged pandemic continues to weigh heavily on the Bank of Montreal
Since the beginning of 2020, all Canadian banks have been in the red zone. BMO is no exception. It has seen its share value decline by 21%, in addition to an 18% drop in the S&P/TSX Bank Index. As a result of the negative impact of the pandemic, the bank’s net income for the third quarter depreciated to $3.5 billion, compared to $4.6 billion in the same period last year.
Stocks are coming out of the water
Last week, BMO shares rallied to 5.7%. There is every indication that the gain was driven primarily by analyst ratings from BofA Global Research (the securities research arm of Bank of America). The analysts upgraded BMO’s rating from “underperforming” to “neutral”. The bank also announced that it will make its products more attractive to U.S. customers through a partnership with The Clearing House Payments Company. This may also be one reason for the turnaround.
After the good news, BMO saw earnings per share increase by 5.3 and over 10 days, volume was up 0.56 million. And it must be said that another increase, in the coming weeks, is not off the table.
In any case, the discussions on the reduction of its foreign asset management activities are at this stage only speculation. No final decision has been made, but it is certain that this transaction may have an effect (positive or negative) on the Bank of Montreal’s share price.
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