A Bank of Montreal sign is pictured in downtown Ottawa March 3, 2009.
BMO is bulking up in the United States with its biggest deal of the Bill Downe era, signalling that the bank does not want to get left behind in the American market by its two biggest Canadian rivals.
By shelling out $4.1-billion (U.S.) in stock for midwestern bank Marshall & Ilsley Corp., BMO adds $52-billion in assets and more than doubles its U.S. branches, to nearly 700. The acquisition also closes the gap with front-runners Toronto-Dominion Bank and Royal Bank of Canada, which have strengthened their U.S. retail operations over the past decade.
Although the timing was unusual for a such a major strategic move, with the holidays only a week away, Mr. Downe, the chief executive officer, simply could not wait.
"We had a very strong year," he said in an interview, alluding to the $2.8-billion annual profit BMO posted less than two weeks ago, its highest ever. "You look at it and you say, 'There likely won't be a better time.'"
The purchase was attractive because BMO's stock price was up 11 per cent in 2010 before the deal was announced; banks finally have greater clarity on the capital rules they will have to follow; and the Canadian dollar is flirting with parity, Mr. Downe said. "You hate to cram these things into the last week of the year. It's very hard on everybody personally. But everything lined up."
The deal - the first truly large one for a Canadian bank south of the border since the financial crisis - is the clearest sign yet that the freeze on deal activity in the financial sector is over. Several smaller deals have taken place, including some acquisitions by TD of the assets of troubled U.S. banks. But until now, no bank has made a big cross-border U.S. bet since the demise of Lehman Brothers touched off a financial panic in 2008.
Mr. Downe has eyed a U.S. deal for years, hoping to branch out and build on Chicago-based Harris Bank, which BMO has owned since the mid-1980s.
Yet although the stars aligned for him, BMO's stock plummeted 6.5 per cent Friday, signalling that investors don't see the merit. Analysts, too, are worried. Their concerns stem from the commercial real estate loans M&I made at the height of the crisis and has been paying for ever since. The bank has not turned a quarterly profit since September 2008, and management previously stated it did not expect to return to the black until mid or late 2011. M&I also received TARP funds from the U.S. government, $1.7-billion of which BMO has to pay back.
Because the loan portfolio is in rough shape, BMO wants to get ahead of the market and will immediately write off $4.7-billion in expected future losses, worth about 12 per cent of M&I's $39-billion loan book. Writedowns like these worry analysts because RBC's U.S. banking operation has been plagued by them, and it is many observers believe the bank's executives would like to backtrack on its U.S. strategy.
But even if BMO can clean up the loans, the bank must also figure out a way to integrate M&I into its Harris operations. Fears on this front prompted Moody's rating agency to put BMO under review for a downgrade shortly after the deal was announced, citing worries about bringing M&I's more risk-prone managers into the fold.
Equity analysts have similar concerns. "BMO is nowhere near the experienced integrator that TD Bank is," noted John Aiken of Barclays Capital. "As such, given that BMO is effectively doubling its U.S. retail banking operations, we believe that there is fairly significant execution risk."
M&I's CEO Mark Furlong will become the head of Bank of Montreal's U.S. personal and commercial banking business, which is based in Chicago. Mr. Furlong will report to Ellen Costello, who will continue to be the CEO of Harris Financial Corp., as well as BMO's U.S. country head.
Some investors think the worries are overhyped, considering that M&I has a strong retail operation, predominately in Wisconsin and Indiana. "Strategically, this is a very good deal for BMO", said Rob Wessel, head of Toronto hedge fund Hamilton Capital, which counts Marshall & Ilsley as its biggest holding. "They get a large and high quality deposit franchise in a good state at a very distressed price."
BMO will pay for the deal in stock, swapping each share of M&I for 0.1257 shares of Bank of Montreal. BMO will also raise $800-million in common equity before the deal closes, likely in July, 2011, to maintain a healthy Tier 1 capital ratio.
BMO expects cost synergies of about $250-million over three years and will also incur restructuring charges totalling $540-million.
With files from reporters Grant Robertson and Boyd Erman
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THE BANK BIO
A few facts about M&I Corp. , the parent of Marshall and Ilsley
Headquarters: Milwaukee, Wis.
Size and scope: The largest bank in Wisconsin, which is in Bank of Montreal's U.S. growth-focus area, centred on Chicago branch locations: 192 offices in Milwaukee, as well as 53 locations in Arizona, 36 offices in Florida, 33 in and around Indianapolis, 26 in and around Minneapolis, one in Duluth, Minn., 17 offices in the greater St. Louis area, 15 around Kansas City and one in Las Vegas.
Total assets: $51.9-billion (U.S.)
Profits: None, lately. The bank has posted a loss of $483.5-million (U.S.) in the first nine months of 2010. That's after losing $858.8-million in 2009.
Government help: Received $1.7-billion in U.S. government aid through the Troubled Asset Relief Program. M&I executives said earlier in 2010 that the company expected to start repaying it in late 2011, once the bank had returned to profitability. It might take until 2013 to fully repay the government.
Stock performance: Before BMO bid of $7.75 a share, the stock fetched $5.79, down from almost $50 in 2007.
Boyd Erman