Mortgages become a loss leader
One way banks are replacing lending income is by pushing financial products through their retail channels. Here’s what Franklin Techar, head of Canadian Banking at Bank of Montreal (USA) (NYSE:BMO), had to say on his company’s strategy:
“…our 5-year fixed 25-year am [amortization] mortgage product was very successful last year in bringing new customers into the company. And in fact, every — for everyone that took that product last year, about 40% of them were new customers to BMO. And for those new customers coming into BMO, we sold an excess of two other products to them…. And as we continue to bring those customers in, I have a huge amount of confidence in our sales capabilities in our branches at this point.”
Bank of Montreal took a lot of criticism for its 2.99% 5-year fixed mortgage last year. It appeared to investors that the offering did little to improve market share while squeezing margins. But BMO is using its mortgage products as a loss leader, like a grocery store, to court new customers in hopes of selling them higher margin products within branches.
Foolish bottom line
This was a strong quarter for the Big 5 reporting a combined $7.33 billion in profits. Many skeptics, myself included, have been looking for a slowdown in core retail lending. But with almost every company in this space posting double-digit growth, I may have to re-evaluate my bear thesis.
The article 3 Can’t-Miss Quotes for Bank Investors This Earnings Season originally appeared on Fool.com and is written by Robert Baillieul.
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