Dominion Bond Rating Service has confirmed its ratings on Bank of Montreal, with stable trends. But the rating agency, while lauding the bank’s recent domestic investment, suggested that the U.S. strategy may carry increased risks.

DBRS said in a report that the ratings and trends reflect Bank of Montreal’s well-diversified Canadian consumer, commercial and wholesale franchises, favourable credit quality, and good expense management, which DBRS believes should contribute to strong profitability.

“Additionally, BMO continues to execute on its U.S. expansion strategy, Harris/Chicagoland Bank, through organic branch expansion and infill acquisitions,” it noted. “With a strategic focus on earnings stability and a conservative business culture, DBRS anticipates the credit and financial risk profiles to remain relatively unchanged in the near term.”

‘With significant investments in its domestic commercial banking sales force and product development over the past several years, the gap between BMO’s market share and the leading competitor in Canadian commercial banking has narrowed substantially during the year,” DBRS said. It expects BMO to make market share gains in domestic business banking, as it continues to benefit from past investments.

On the downside, DBRS said the bank’s ratings are limited by its weakening domestic consumer deposit and mortgage and loan market shares over the past two years (a result of a strategic decision to maintain margins) which could negatively impact franchise strength in the long run; its ability to grow meaningfully in its U.S. retail banking franchise without incurring higher integration risk; and, its U.S. direct investing platform, Harrisdirect, which continues to underperform.

The rating agency notes that BMO has recently stated its willingness to make larger U.S. retail banking acquisitions in order to become a leading U.S. Midwest bank. However, DBRS cautions that integration risk would increase as Harris Bank targets larger banks outside of its existing geographic footprint. And, it notes that Harris Bank’s top two competitors (Bank One and LaSalle) are also aggressively growing market share. “Bank One has experienced little disruption from its integration with JP Morgan Chase & Co. and LaSalle has reversed its five year trend of market share loss with an aggressive pricing strategy,” it said.

“The most significant U.S. acquisition, Harrisdirect, has yet to meet financial performance objectives; the challenge is to enhance revenue as BMO has already changed its pricing structure and lowered the unit cost per trade to compensate for lower transactional volumes and aggressive competitive pricing,” DBRS added.