BMO to double US branch footprint with Bank of the West acquisition

Bank of Montreal's $16.3 billion deal for Bank of the West will give it a large presence in California and across the western U.S., accelerating the bank's growth potential in the country, executives said.

BMO has been explicit about its interest in buying in the U.S. and had been reported to be a leading bidder for BNP Paribas SA's unit in the country.

"We've been interested in this particular asset for a very long time, for years in fact," BMO CEO William Darryl White said on a conference call on the transaction. California is "one of the greatest markets on the planet. ... It's got a population that's bigger than Canada. It's got a GDP that's almost 2x Canada. And we've got a scaled entry here."

Through a combination of several acquisitions, including a $4.29 billion purchase of Marshall & Ilsley Corp. in 2011, and organic growth, the U.S. accounts for 36% of BMO's pretax, pre-provision earnings, up from 15% in 2010. The bank projected that the Bank of the West acquisition, which will increase its assets in the country by $105 billion to $424 billion, will lift the contribution to 44%.

The deal is a "poster child for a scaled entry into a market," said David Casper, BMO's head of commercial banking in North America. Similarly, on the retail side, scale is "really critical in the marketplace," said Erminia Johannson, head of personal and business banking in North America. "We see this as an accelerant."

BMO has 524 branches in the U.S., concentrated in the Midwest. The bank plans to close none of the 514 branches it will add in the deal, but White said the transaction is consistent with BMO's "branch-light" strategy, and the bank will "not necessarily" look to add to its density elsewhere around the country. "If we, over time, saw something else that was interesting, that would be one thing," White said. "But we certainly don't feel like we need to fill in, in those other states with branches."

The $16.3 billion price tag includes $2.9 billion in "excess" capital at Bank of the West, which has a common equity Tier 1 ratio of 14.4%. BMO, which has a CET1 ratio of 13.7%, will mostly be using its own capital stockpile in the deal. White said the bank is targeting a CET1 ratio of about 11% in the first quarter after closing, which the bank expects in 2022, and "we will build thereafter."

BMO is targeting cost savings equal to 35% of Bank of the West's expenses, mostly from centralized overhead and shared services. The efficiencies reflect "the excess capacity that we've built in our U.S. operations over the years for growth opportunities such as this acquisition," CFO Tayfun Tuzun said.

The bank projected the deal will be 10% accretive to EPS in its fiscal 2024.

White acknowledged uncertainties about the environment for deal approvals as senior regulators push for a review of the process. But the executive said the Federal Reserve's approval of three significant transactions Dec. 17 was "a decent sign."

"We think the transaction meets all of the requirements for regulatory approval," White said. "There is no deposit concentration. There are no competition issues. There are no financial stability concerns. Our U.S. operations as we go into it have strong capital and liquidity positions, and they'll continue to do so after the transaction. Both entities ... have outstanding [Community Reinvestment Act] ratings and robust commitments to the communities."

BMO's shares fell 2.4% on Dec. 16, the day of a news report that it was a leading candidate to buy Bank of the West, and fell another 1.9% on Dec. 17, while the KBW Nasdaq Bank Index cumulatively slipped 1.8% over those two days. BMO's shares were down another 1.9% at about 10:45 a.m. ET on Dec. 20, compared with a 2.8% decline in the KBW Nasdaq Bank Index.

In a note Dec. 20, Barclays analyst John Aiken said he can "see the strategic benefits from the acquisition, including further diversification of [BMO's] loan book and expanding its geographic footprint."

However, Aiken said, "The market's approval of the deal will hinge on accepting a 35% reduction in [Bank of the West's] cost base, despite not closing any branches. Further, BMO's relative capital advantage has now effectively disappeared overnight."