The Bank of Montreal is a banking behemoth. When a company this size decides to change strategy, and in particular, a direction that looks to be culturally significant, the world takes notice.
In late November, BMO announced that they were starting to wind down on its oil and gas investments within the US. This includes all of its investment banking business within this US sector, and will instead focus on Canadian industry.
Whilst this is clearly an unwinding of US investments, the wording was actually “the financial decision for an orderly wind-down of our non-Canadian investment and corporate banking energy business.”
This will mean reducing around 50 positions. This is a decision that other investment groups have made, due to US oil and gas producing years of poor returns. There’s been a reduction in oil demand with low prices and low-premium mergers.
Is BMO more responsible than American Banks?
On the face of it, BMO has exited a struggling US industry that happens to be producing poor returns. It’s quite a jump to suggest that BMO wants to focus on Canadian industry out of principle, or that oil and gas is against their investing ethics. After all, their focus on Canada isn’t a focus on Canadian green energy.
However, BMO certainly does indicate a growing focus on low-carbon investments with their Responsible Funds. They are clear that complete fossil fuel disinvestment is perhaps premature, given that fossil fuel will still make up half of the global energy mix in 2040. However, the 2020 lockdown measures had a profound effect on the reduction of fossil fuel usage – something that no doubt played a factor in their move away from US oil and gas.
Furthermore, it’s inevitable that banks will turn away from US oil and gas given that there’s an oversupply right now, which is suppressing prices. Demand will no doubt climb back up in 2021, slowly, but it will be a while before it reaches pre-coronavirus levels. By that point, we will have made further progress with green energy.
BMO looks to InverstorLine
BMO generates much of its revenue from its InvestorLine, an online trading platform for retail traders. InvestorLine reviews are quick to point out just how accessible the broker is to retail traders, with no minimum deposits, reasonable fees and a large selection of investment products.
What’s interesting here is that BMO has created AdviceDirect within this, which is someway between a financial advisor service and a DIY product. This is where customers make use of the discount brokerage, but also receive some help regarding certain investments.
Customers benefit from nuanced information flows, lots of learning resources and a team of financial advisors. This is a nice middle ground for anyone that doesn’t want to pay out for a fully fledged financial advisor model, and still wants an element of choice.
For between $750 to $3,750 per year, BMO has set up a clean revenue-stream that captures much of the growing retail investor demand. The pandemic throughout 2020 saw a significant rise in retail investors. A bored middle class with money to spare will have countered BMO’s struggling US gas and oil investments.
Of course, Robinhood was the biggest beneficiary from this – a discount broker that has seen the rise of meme stocks and absurd market behaviour. BMO will have unlikely seen quite as many sign ups as Robinhood, but 2020 has been a good year for brokers. Volatility remains high and market growth remains strong.
In fact, the rising volume or retail trades has been the cause of our V-shaped recovery. Or at least, the stock market’s V-shaped recovery.
Conclusion
BMO has had a strong recovery since the March crash, having almost recovered to pre-coronavirus prices. We are yet to see where their investments are focused on Canadian industry, but their appetite for discount brokerage and digitized financial products is clearly helping them survive during a time of credit shortages and volatile prices.