BUSINESS WATCH

A survival strategy at the B of M

By the year 2000, Matthew Barrett wants half of the Bank of Montreal’s revenues to come from the United States

Peter C. Newman April 9 1990
BUSINESS WATCH

A survival strategy at the B of M

By the year 2000, Matthew Barrett wants half of the Bank of Montreal’s revenues to come from the United States

Peter C. Newman April 9 1990

A survival strategy at the B of M

BUSINESS WATCH

By the year 2000, Matthew Barrett wants half of the Bank of Montreal’s revenues to come from the United States

PETER C. NEWMAN

Matthew Barrett, the Bank of Montreal's new, 45-year-old chairman, meets later this month with 200 of his top executives in Toronto to chart his troubled institution’s survival strategy for the 1990s. The 27-year corporate veteran, who joined the Bank of Montreal at 18 and, except for a four-month lapse with the Royal Bank of Canada, has held just about every managerial position the Montreal has to offer, is taking over Canada’s fourth-largest bank at a particularly difficult time.

“The premium now, ” he told me, “is on financial expertise, manoeuvrability and valueadded pricing. The Old Boys’ network no longer means a thing. You’re under pressure for performance, and that’s all that counts.”

True enough, but unfortunately for Barrett, the bank he has inherited has for the past decade and a half been run, as the ultimate expression of banking’s Old Boys’ network, by one of its chief paladins, Bill Mulholland. Under his patronizing, closed-end and chaotic stewardship, the bank lost a generation of senior managers, most of them fired at Mulholland’s whim. Without exception, they immediately moved to higher-paying jobs in competing financial institutions and made life difficult for their former boss. At the same time, the bank lost some of its market share of personal and commercial loans, despite the surge in consumer credit. The Montreal’s profit ratios declined well below industry standards—a net income of 70 cents per $100 of assets for 1988, for example, compared to an average of 98 cents for banking’s so-called Big Six, and $1.15 for the high-flying Toronto-Dominion Bank.

The most serious handicap of the Mulholland legacy was his penchant for pretending he was a world statesman by grandly shovelling out more than $5 billion in loans to less developed countries in South America. At one point, the Bank of Montreal had 95 per cent equity base invested in dubious pieces of wallpaper. The extravagant loans have since nearly all turned sour, and even after placing reservations against most of that huge burden, debts of $1.8 billion (or 53 per cent of equity) are still on the books. Mulholland also lent Robert Campeau $25.4 million, and the bank is now suing him for lapsed interest payments.

To his credit, Barrett doesn’t even try to defend the Mulholland record. “Lending money when you really can’t secure any backup assets turns out to be of dubious virtue, ” he said. “It’s embarrassing to admit it, but most of these loans were made in the 1970s when the conventional wisdom was that sovereign nations can’t go broke. That conventional wisdom was wrong. But, having said that, we’re in the business supposedly of making loans that take into account downside scenarios and, frankly, we didn’t do that in these situations. ”

Barrett realizes there’s a present danger of overreacting to the past by putting too much emphasis on lending only to The Financial Post 500 and avoiding the kind of reasonable risks with less well-established firms that are supposed to characterize constructive banking. “You have to get the balance right, but there is no premium for taking bad risks, ” he warned. “We think the economics of staying in highquality, more selective lending makes better sense than trying to be fashionably creative. ”

The most radical departure in Barrett’s thinking to date is his determination to turn the Montreal into a North American, rather than purely Canadian, institution. By the end of the decade, he intends to shuffle priorities so drastically that at least half the bank’s revenues will originate in the United States. “It makes sense to leverage off your strengths, ”he said, referring to the Montreal’s ownership of the fastgrowing, Chicago-based Harris Bankcorp Inc. “Also, with the Free Trade Agreement it’s essential for us to straddle the border and, in terms of banking services, Canada is already pretty saturated. Without being arrogant about it, the U.S. market is very fragmented, and I think Canadian banks can bring something to the party by running larger branch networks. ”

While Barrett praises Brian Mulroney’s free trade initiative, he chose not to comment on Meech Lake, but does stick his neck out an inch on the Goods and Sevices Tax: “I must have a latent death wish to talk positively about these three letters, GST, but I like it because it’s a tax on consumption, not income, and I would even support a higher GST rate—as long as it’s offset by reduced income taxes. ”

The new chairman raised the hackles of his fellow bankers scrambling to be allowed into the insurance business by publicly stating that the idea was “bananas.” He feels strongly that banks should not be artificially restrained from offering any financial services, and conceded: “If everybody is having our lunch, we should be allowed to have everybody else’s. But I don’t find the idea of selling insurance terribly exciting, and we have lots of room for improvement and upside profit potential in what we’re already doing. ”He wants Ottawa finally to sort out the four-pillar—banks, trust companies, insurance companies and the securities industry—dilemma and is wildly opposed to the idea of chartering American Express as a Canadian bank.

He differs sharply with other Canadian bankers who still pretend that they are operating world-class institutions. (In 1983 tallies, Canada counted six banks among the top 50; now we have only one.) “It’s arguable whether Canadian banks can still legitimately aspire to world stature,”he said. “Besides,how can we possibly compete in our cost of capital with the Germans or Japanese? We’re at a major disadvantage trying to price international deals, and if you were to combine all the Canadian banks into one $400-billion institution, our competitiveness wouldn’t change one iota. ”

Barrett seems to be thriving in his new command, and first indications are that he may succeed where his predecessor failed. Perhaps his most attractive quality is a down-home modesty not common to Canadian bank chairmen. “Time will tell whether I have the qualities for this job,” he said. “But I’ve been in banking 27 years, and you can teach a monkey any business after 27 years. After all, it’s not brain surgery, and we have an experienced team in place. I like to think there’s a teller out there and that one day she will become chairman of this bank. ”

Matthew Barrett remains an unknown quantity. But the Bank of Montreal has joined the real world at last.