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How BMO is Doing It

15 March, 2012 / by Bryan Jaskolka

Bank of Montreal knows that those who fail to plan, plan to fail; and that’s why when they hugely slashed their mortgage rates last week, they were prepared. And they made sure that Ottawa was too.

When BMO first offered the limited-time mortgages in January, it gave Ottawa great cause to worry. Here they were, trying to warn Canadians about rising household debt levels and not taking on too many Toronto or Ottawa mortgages, only to have BMO give those same Canadians an offer they couldn’t refuse. This time though when they made the same offer last week, BMO made sure that they spoke with government officials to show them that the offerings included shorter amortization periods (something Ottawa likes,) and to show them that it wasn’t irresponsible lending.

At the same time, BMO still has to make sure that the mortgage offerings don’t make them go belly-up; so how do they do that? According to Bank of Montreal chief executive officer Bill Downe the bank was, “able to plan for that offer in a way that preserved our margins.” That planning mostly included squirreling away cheaper funding in the bond market, which gives the bank more money to work with, and a better ability to offer such huge mortgage discounts. How long had they been stockpiling the cheap funding? For months and months, probably at least since their last offering in January. A smart move for a bank that many think is just trying to keep its head above water.

There has been a lot of speculation that this latest move of BMO’s doesn’t have all that much to do with giving consumers great deals but rather, giving the bank a chance to reclaim some of its profits. The bank left the mortgage broker channel in 2007, and shortly after saw its profits dwindle down to 6.5% from 9%, numbers that may not seem like a lot but translate into billions in the mortgage book. Given that Ottawa has also kept interest rates at historic lows for the past 18 months, and one can easily see how BMO’s profits are shrinking by the day, and why they needed to plan for months before offering these discounts.

When you understand the planning and reasons behind it, it’s really quite easy to see how BMO can continue to offer such discounted mortgage rates for the entire length of the promotion while other banks, who aren’t quite so prepared, need to pull their offers early. But some of those other banks might have more to learn from BMO than just how to stockpile cheap bond funding. CIBC, who recently announced it will also be pulling out of the mortgage broker channel, should also seriously consider the hit BMO has taken from doing the exact same thing.