Bank of Montreal is venturing deeper into China by expanding its relationship with the country’s largest state-owned bank.
A new memorandum of understanding with Industrial and Commercial Bank of China Ltd. (ICBC), signed in November and announced publicly on Monday, sets terms to co-operate on everything from asset management and trade finance to sharing techniques for curbing fraud.
Crucially, the agreement opens a pathway for BMO to distribute an array of investment products, including mutual funds and exchange traded funds (ETFs), across China through ICBC’s vast banking network. By most measures, ICBC is the world’s largest bank with roughly $5-trillion in assets. BMO signed its first memorandum of understanding with ICBC in 1997, and has had ties to the Chinese lender for three decades.
The new agreement comes just as China has promised to liberalize access to its financial services sector for foreign companies. BMO is well-positioned to capitalize on a push to greater openness as the only Canadian bank with a wholly owned subsidiary in China, called Bank of Montreal (China) Co., more commonly known as BMO ChinaCo. Executives at BMO often describe the bank’s strategy in China as a long game, preaching patience as Canada’s federal government makes overtures to forge closer trade ties and China’s hyper-vigilant regulators grow more familiar with Western banks.
“What we’re doing is just kind of setting things in motion,” said Gilles Ouellette, group head of BMO Asset Management, who also chairs the board of BMO ChinaCo. “We’re getting our alliances ready so that when it does open up, we’re ready.”
Banking in China is based heavily on relationships, especially when dealing with state-owned enterprises that “toe the party line,” Mr. Ouellette said. Working with a bank such as ICBC, which is closely tied to government, comes with its own set of complexities but can also be instrumental to getting things done in Asia’s largest economy.
“The relationship is going to develop over time,” Mr. Ouellette said.
While BMO’s new pact with ICBC has several facets, the ability to put BMO Asset Management’s proprietary products on ICBC’s shelf is a central feature of the deal. BMO owns a 28-per-cent stake in Chinese mutual fund company Fullgoal Fund Management Co. Ltd., but had yet to distribute BMO asset management products in China.
ICBC, in turn, has a growing presence in Canada and was intrigued by BMO’s ability to manufacture investment products, including its growing suite of ETFs. BMO claims it was the first Canadian bank to offer ETFs in Asia.
“The Chinese have largely had all the distribution tied up. And if you want distribution in China in your lifetime, you have to have joint ventures or distribution agreements or something like that,” Mr. Ouellette said. “The ICBC has got an enormous distribution in China that we’re trying to tap into. There’s no possible way we could replicate that.”
The motion of understanding also covers areas such as corporate and project financing, as well as cross-border renminbi co-operation. ICBC already serves as the clearing bank for North America’s first RMB trading hub, based in Toronto, where transaction volumes have fallen shy of expectations so far.
For the time being, BMO intends to expand its existing operations in China by focusing on trade flows to and from North America, including through its U.S. subsidiary, BMO Harris Bank. But China has promised it will soon allow foreign firms to hold majority stakes in some financial firms, including commercial banks, and BMO will at least consider whether to pursue further acquisitions.
“We might. We don’t have any plans just now,” Mr. Ouellette said. “Because this opening up [of China’s financial sector], it’s a little fuzzy about when that’s going to happen.”