Bank of Montreal and CIBC square off in Chicago

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For a decade, Bank of Montreal executives eyed with envy Chicago's bustling corner of West Washington Street and North Wacker Drive.

The location, across from the 1920s-era Civic Opera House, sees thousands of weekday commuters shuttling between rail stations by the Chicago River and offices in the Loop business district. In other words, a perfect spot for a BMO Harris Bank branch, if it wasn't for the McDonald's restaurant on the corner.

So when the fast-food chain vacated in November, the bank converted the former burger joint into a 2,500-square-foot "smart branch" featuring ATMs that don't require debit cards, laptop-touting employees, Wi-Fi, and an Inc. pickup locker named "Moon."

The branch is part of the battle being waged by Bank of Montreal and its smaller rival, Canadian Imperial Bank of Commerce, as they compete against JPMorgan Chase & Co. and almost 200 other lenders in so-called Chicagoland — one of the toughest banking markets in the U.S.

"You have an oversupply of banks competing for a finite business," Christopher McGratty, an analyst at Keefe, Bruyette & Woods, said in an interview.

Street rivals

The two Canadian rivals literally face each other in Chicago, with their main offices on opposite sides of South LaSalle Street in the financial district. Canadian Imperial took over PrivateBank's 90-year-old building after last year's $5 billion purchase of the commercial lender. Bank of Montreal is in the Harris Bank Complex, its blue and red logo above the street-level frontage of the glass-and-steel west tower.

Bank of Montreal gained a Midwest foothold with the purchase of Harris Bank in 1984. It then spent years snapping up small lenders until landing its $4.3 billion takeover of Milwaukee-based Marshall & Ilsley Corp. in 2011. That deal doubled its U.S. deposits and branches.

"In Chicago specifically BMO is fairly well regarded," Nathan Race, a Chicago-based bank analyst with Piper Jaffray & Co., said in an interview. "They have a nice retail franchise, a good private banking model and a good wealth management unit."

While BMO Harris is holding its own for market share, U.S. rivals are expanding in America's third-largest city, heightening the competition. The latest move was by Fifth Third Bancorp, which agreed in May to buy Chicago-based MB Financial Inc. for $4.7 billion.

"We will have a good size advantage," Fifth Third Chief Executive Officer Greg Carmichael said in an email. He said the merger will elevate Fifth Third to the No. 2 player in retail deposits, while adding to its commercial lending business.

JPMorgan has the most overall deposits in Chicagoland, with 22 percent market share, while BMO Harris Bank ranks second with 11.5 percent, according to Federal Deposit Insurance Corp. data to June 2017. Bank of America Corp. is third, at 11 percent, followed by Northern Trust Co. with 6.4 percent and CIBC's PrivateBank, with 4.4 percent. Fifth Third's takeover could leapfrog the Cincinnati-based lender into a top-5 spot.

"The MB sale to Fifth Third is going to end up being a material shakeup in the marketplace," Piper Jaffray's Race said.

Chicago's banking scene was upended 11 years ago when Dutch lender ABN Amro Holding NV sold LaSalle Bank for $21 billion to Bank of America. That deal led to an exodus of senior employees including veteran banker Larry Richman to PrivateBancorp Inc., the commercial lender that operated as PrivateBank.

On the map

"The big bank deals shake the market, and what happens typically is there are offshoots and spinouts," KBW's McGratty said. "When BofA bought LaSalle, that really put PrivateBank on the map."

PrivateBank caught the eye of CIBC CEO Victor Dodig, who began talking to Richman almost four years ago. CIBC bought PrivateBank in 2017, the largest acquisition in its 151-year history.

The PrivateBank takeover and Fifth Third's purchase of MB Financial could create "significant market dislocation," and spark more deals, McGratty said in a June 5 note.

"Chicago still has far more banks and market share remains more fragmented than is found in most of the largest cities in the U.S.," Fifth Third's Carmichael said. "It's reasonable to assume that some of the banks there might seek to partner with others."

Cool to deals

The Canadian banks in Chicago seem cool to acquisitions, instead favoring internal expansion by grabbing more deposits and clients.

"The short-to-medium term is an organic strategy," Dodig said of the potential for more U.S. bank deals. Any "tuck-in acquisitions" will likely focus on wealth management, he said in a June 12 interview in Chicago.

CIBC's U.S. strategy targets mostly midsize commercial clients. Richman, head of the U.S. region, is working to offer more services and attract bigger clients. He's also looking to bolster retail deposits with a new online high-interest savings account.

"Given who we are and our focus and our market, driving increased deposits and deposit share is really important, but we're not going to be in the retail banking business per se," Richman said in an interview.

U.S. profit

CIBC earned C$272 million ($204 million) from U.S. commercial banking and wealth management in the first half of this fiscal year, or 10 percent of overall profit at Canada's fifth-largest lender. The bank aims to get 17 percent of its earnings from the U.S., including capital markets, by 2020.

At BMO Harris Bank's headquarters, CEO David Casper also prefers building over buying.

"We've had really strong organic growth, which we'll continue," Casper said in an interview.

BMO Harris Bank aims to push for more commercial loan growth, take advantage of cross-border business opportunities with its Canadian operations, expand its national businesses including equipment financing, and add deposits.

Digital strategy

The lender also seeks more growth in personal banking and small-business lending. That includes winning customers through a revamped digital banking platform and converting more locations to "smart branch" outlets such as the one on Wacker Drive. Eight of about 200 BMO Harris Bank locations around Chicago are these smaller-format branches, with more to come.

Bank of Montreal earned C$658 million in the fiscal first half from U.S. banking, 30 percent of overall profit at Canada's fourth-largest lender. The firm is banking on the U.S. for even greater contributions to its bottom line.

"We love the market, we love our current capabilities and we think we're well positioned against anybody," Bank of Montreal Vice Chairman Frank Techar said in an interview. Using a hockey analogy, he added: "The U.S. is center ice for us at this point."

Bloomberg News