CANADA FINANCE-BMO open to U.S. growth as risks abate, CEO says

(This story is part of a special Reuters News package highlighting Canada's financial sector. For a complete listing of stories, click on [ID:nN19445229].)

* Sees better U.S. buying opportunities than 2 yrs ago

* Believes U.S. housing market approaching turnaround

* Sees provisions for bad loans at plateau through 2010

* Eyes capital market growth in munis, energy, mining (Repeats Reuters interview from June 2)

By Andrea Hopkins and Pav Jordan

TORONTO, June 2 (Reuters) - As Canada's profitable and proud Big Five banks eye opportunities amid the global financial carnage, Bank of Montreal's (BMO.TO) chief executive can already see how the nation's banks are carving up the pie.

"Fifteen years ago the Canadian banks had strategies that imitated each other. Today, you've seen a divergence of the banks' strategies. They are all different, and there's room for at least three of the five to be successful," CEO Bill Downe said in an interview on Tuesday at BMO's Toronto headquarters.

Such a tongue-in-cheek statement from the chief executive of Canada's fourth-largest bank belies the seriousness with which Downe takes BMO's mantra of customer relations and doing your homework as he carefully sizes up potential U.S. acquisitions to expand the bank's business.

While observers can easily categorize BMO's competitors according to their ambitions for growth -- Toronto-Dominion Bank (TD.TO) as a retail banker on the U.S. East Coast, Bank of Nova Scotia (BNS.TO) in emerging countries in Latin America and Asia, and Royal Bank of Canada (RY.TO) in global capital markets -- Downe is simply looking to strengthen BMO's reach across its core Canadian and U.S. Midwestern market.

If that means buying U.S. banks and insurers at a time when rivals worry about toxic assets and question the value of banks that have taken bailout money, Downe is willing to take BMO's substantial capital and do the deals.

"The ability to acquire properties at a price that will allow you to earn returns today is significantly better than it was 24 months ago," said Downe, noting the ability of U.S. financial institutions to tap equity markets in recent weeks is another encouraging sign that the sector is normalizing.

That's not to say 57-year-old Downe, who started at BMO in 1983 as a credit analyst, does not do his homework.

"We picked through hundreds of banks to buy the 16 banks that we bought, and tried not to buy three times book," he said of recent acquisitions.

NOTHING FLASHY

As you'd expect of Canadian banks, whose stodgy approach to risk ensured they were some of the biggest players left standing after the financial meltdown last year, BMO's U.S. shopping spree has never been flashy.

Since acquiring Chicago-based Harris Bank in 1984, BMO has bought 290 banks -- some with as few as two branches, some with as many as 40.

Asked what BMO's niche is, compared to the clear paths forged by competitors, Downe describes a map that stretches across Canada and then down America's midsection, a "T" that for Downe is more a way of life than a geographic identity.

"We are a Midwestern bank," said Downe. "All of Canada and the Midwest of the United States are very similar from my perspective, in business, logic, work ethic, what time people get up in the morning."

He also shrugs off caution about where and when the economic downturn will end, noting you cannot steer a car by looking in the rearview mirror. He sees a light at the end of the recession tunnel, predicting there will be a quarter of positive economic growth in 2009 and uneven growth in 2010.

The U.S. housing market has to turn to spark the recovery, but the upward swing is inevitable as housing prices hit bottom and pent-up demand for homes kicks back in.

"The United States still needs one and a quarter million homes a year and is building less than 600,000 homes right now ... (and) is approaching a market-clearing price," he said. "I believe the housing market is going to clear this year or in the first half next year."

An economic recovery is key to stemming the flood of bad loans that plague banks during recession, and Downe said he sees loan loss provisions plateauing at the current level until the U.S. economy starts to grow again.

BMO set aside C$372 million ($324 million) to cover bad loans in the second quarter of 2009.

"(I don't see a spike) nor do I see those provision levels coming down until we have positive growth. And we probably will have positive growth in one quarter of this year, maybe. And then we will have uneven growth in 2010," he said.

Downe also said BMO plans to sharpen its focus in capital markets on relationship clients in media and communications, business services and education.

The bank recently acquired an independent municipal-bond trading firm in Chicago, which Downe said reflected "the belief the municipal bond business is going to have a very significant renaissance."

The bank has a strong continental and global presence in the independent oil and gas sector, in mining and in agriculture.

For Downe, who meets reporters for an interview not in his corporate office or boardroom but in the lobby of the branch that sits at the base of BMO's Toronto office tower, the key to success lies in unglamorous hard work -- and the courage to rein in borrowers who want to take one step too far.

"If you have developed some wisdom as a lender of money about what will work and what won't work, saying no is not saying no because I'm not willing to do it, it's saying no because it's not the right thing for you to do. And my advice is that you don't."

($1=$1.15 Canadian) (Additional reporting by Jack Reerink; editing by Rob Wilson)