improve its customer loyalty is starting to pay off, but it faces a
fight to close the gap on its more successful Canadian rivals,
writes Douglas Blakey. The group is making retail
banking its primary growth engine in 2008, targeting a cross-sell
ratio of seven products per household.
Bank of Montreal (BMO), Canada’s fourth-largest banking group by
assets, has given an optimistic report of its efforts to revitalise
its once-flagging retail banking business. The simple aim of the
programme centres on scoring higher on its most important
customer-loyalty measure: how comfortable its retail banking
customers are in recommending BMO to friends or family.
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Following in the footsteps of bullish Canadian rivals Royal Bank of
Canada and Toronto-Dominion Bank Financial (see The first North
American bank), BMO has said it also expects the stricken US
market to offer acquisition opportunities over the course of the
next year.
BMO, which reported net income for fiscal 2007 down 20 percent,
failed to achieve most of its financial targets, and posted
writedowns and trading losses of around C$1.66 billion ($1.64
billion) for the year; disappointing, but much less than the losses
suffered by rival Canadian Imperial Bank of Commerce (CIBC) the
country’s fifth-largest bank, which posted C$4.13 billion in
pre-tax writedowns tied to US subprime mortgages.
While BMO’s objective to produce a 20 percent return on equity has
been undermined by credit market losses, it is fighting back in
retail banking, the business line it believes will drive future
growth. “Retail will be BMO’s primary engine of growth,” BMO’s
president, Bill Downe, said at an investor day on 15 April.
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By GlobalDataBMO did report a record net income of C$1.25 billion, up 9.4
percent year-on-year, at its personal and commercial Canadian unit
due to what the group described as a “branch-driven sales strategy,
systems and process improvements and high-impact product
offers”.
And based on the average of the past three years’ results, the
bank’s Canadian Personal and Commercial banking arm already
accounts for 50 percent of the bank’s net income. “Our instincts
told us that none of the [other Canadian] banks were doing a
particularly good job at making it easier for their customers to do
business. When I was appointed CEO, this became our number one
priority. We intend to take market share in every category where we
compete,” added Downe.
Retail banking highlights
Despite a difficult year and an extremely competitive Canadian
market, BMO reported a number of retail banking highlights in 2007.
Loan growth overall was up 17 percent year-on-year as of the first
quarter of 2008 and retail deposit market share has stabilised at
about 12 percent.
The group added more than 100,000 new active chequing account
customers; its growth in credit card balances accelerated from 4
percent two years ago to almost 14 percent in the first quarter of
2008; growth in personal loans has accelerated from 7 percent two
years ago to 17 percent in Q1; and since last April, the percentage
of households retained has improved from 92.6 percent to 92.9
percent.
According to BMO’s CEO, Frank Techar, the group recognised in 2007
the need for a “fundamental change” of direction. Among BMO
initiatives in the past year, it has ended the outsourcing of its
retail mortgage business to brokers and instead hired its own
mortgage specialists; linked branch customer loyalty targets to
staff compensation; and invested in its branch network.
“I think the reality was over the last three or four years we
weren’t doing it [investing in the branch channel] and now we’re
back,” said Techar. “In 2007 we increased our spend with more focus
on expanding our footprint with the addition of 22 branches. We
have 21 new branches in the pipeline for 2008 with a similar level
planned for 2009.”
Product innovation coupled with shrewder marketing has also been
targeted as a source of growth. BMO recently extended its loyalty
programme for current account customers by awarding Air Miles
loyalty points for debit card transactions, in an attempt to target
the six million Air Miles collectors in Canada who do not bank with
BMO.
“It is one unique feature we have, one that is worth its weight in
gold in what is largely an undifferentiated Canadian retail banking
landscape. An active Air Miles collector can be found in two-thirds
of Canadian households and we have the exclusive banking
relationship with Air Miles,” stated Sandra Hanington, BMO’s
executive vice president for customer strategy.
Linking mortgages to free banking
BMO also rolled out a new offer linking its mortgage products to an
offer of free banking, with customers who take out a new five-year
mortgage or renew or refinance an existing mortgage for five years
receiving Performance Plan, BMO’s packaged current account, for
free over the term of the loan. Performance Plan, which represents
BMO’s entry-level packaged account, currently charges customers a
monthly fee of C$13.95.
“We have accelerated programmes to bring new products and services
to market that our customers want and challenge the notion that
there’s any bank in the market that we can’t take market share away
from,” stressed Downe.
In September last year, the bank ran a nationwide advertising
campaign to promote the free banking offer, in the hope of boosting
its cross-sell ratio towards its target of seven product categories
per household. “Our opportunity, the way we measure share of
wallet, is to have seven product categories per customer. We’re
[still] well away from that seven number,” said Techar.
BMO admitted its ranking for customer loyalty has been a source of
disappointment to the bank in recent years and despite an improved
performance in the past 12 months, it continues to trail
Toronto-Dominion, which topped a recent survey on loyalty for the
second successive year as well as rivals Scotiabank and RBC
Royal.
The 2007 Canadian Retail Banking Customer Satisfaction
Study by research group JD Power, which examined customer
satisfaction across six factors (listed in order of importance):
transaction experiences; facility; account set up/product
offerings; account statements; fees; and problem resolution, ranked
BMO fourth of the Big Five Canadian banks, only just ahead of
CIBC.
Customer advocacy
BMO is fighting back by implementing what it terms Net Promoter
Score (NPS).
“We implemented the use of NPS to track our progress on the loyalty
front. This measures the strength of our customer advocacy, and our
vision is to earn a score of 100 wherever we operate. Our objective
is clearly to be number one in the marketplace in customer loyalty,
and we believe this competitive space is open and we intend to fill
it,” said Techar. “Quite simply, our vision is for every single
customer to be a strong advocate of our company. We ask one
question: how likely are you to recommend BMO?”
While the bank has reported an increase in initial NPS scores, it
has not closed the gap on its rivals in terms of loyalty. “Relative
to the competition in the personal segment, our NPS score has
remained relatively flat, so while we are happy with the increases
reported, we haven’t made up any ground on the competition and
right now we’re in fourth place.
“It’s a five-point score, five being the best, one the worst. If
you look at our performance versus the others in the marketplace…
we have got a long way to move those dissatisfied customers to a
five,” added Techar.
BMO’s US business looks for
opportunities
In contrast to BMO’s Canadian business, Net Promoter Scores from
the group’s US retail banking business are much more encouraging,
according to Ellen Costello, chief executive of Harris, BMO’s
Chicago-based US retail bank.
“Our NPS continue to be higher than network banks such as Chase. In
2007, our retail NPS was 41 percent versus the average for network
banks at 26 percent and community banks at 49 percent.”
In the US, BMO has benefited as a result of not originating
subprime mortgages and is also well placed in some key
markets.
“The Chicago housing market is performing better than other
regions in the country [and] we have added mortgage originators to
capture the market opportunity. In 2007, our mortgage volumes were
up 37 percent when the overall market [in the US] is down 22
percent,” said Costello.
She added that there is a clear prospect of further consolidation
in the US banking market, accelerated by the difficult economic
climate, which may present further acquisition opportunities.
“There will be more opportunities at better prices than in the past
and we are monitoring these very closely.”
