Bank of Montreal plans $3.15-billion share offering to meet new regulatory capital requirements

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Bank of Montreal BMO-T is raising funds through a major share sale in a move to bolster its reserves just days after Canada’s banking regulator increased the ceiling on banks’ required capital levels.

The lender said Monday that it plans to raise $3.15-billion through a share offering to meet the regulator’s raised capital requirements. Last week, the Office of the Superintendent of Financial Institutions (OSFI) increased the minimum capital levels that the country’s largest banks must hold starting Feb. 1, citing rising financial risks as inflation and interest rates strain the economy.

BMO plans to sell 11,805,000 common shares to the public for $118.60 per share for total gross proceeds of approximately $1.4-billion. The bank is leading a syndicate of underwriters that it has granted an option to purchase an additional 1,770,750 common shares at the public offering price up to 30 days after closing.

It is also selling an additional 14,755,477 common shares for $1.75-billion through a concurrent private placement to a pool of institutional investors including Caisse de dépôt et placement du Québec, Ontario Municipal Employees Retirement System, Alberta Investment Management Corp., Healthcare of Ontario Pension Plan, Public Sector Pension Investment Board, Canada Pension Plan Investment Board and BNP Paribas SA. As part of the private placement, BMO will pay each of the institutional investors a fee equal to 3.5 per cent of the respective purchase price.

The share sale is about 3.9 per cent of the lender’s 677.1 million outstanding shares. BMO previously raised $2.7-billion by selling stock in March to help pay for its pending $17.1-billion acquisition of California-based Bank of the West from BNP Paribas.

Other than the private placement to BNP Paribas, the deal is expected to close on Friday. The private placement with BNP is contingent on the closing of the Bank of the West deal, which is expected early next year.

Several banking analysts said last week that BMO would be the bank most affected by OSFI’s increase to the minimum capital threshold. Some estimated that BMO could be at risk of falling below that new level when it closes its Bank of the West purchase.

BMO recently bumped back its target date to close the deal by up to three months, to the first calendar quarter of 2023. The bank had originally hoped to seal the acquisition by the end of 2022.

Last Thursday, OSFI said it will raise its domestic stability buffer from 2.5 per cent of risk-weighted assets to 3 per cent – requiring banks to build up a larger store of capital that could later be released during tougher economic times to help absorb credit losses and keep banks lending. OSFI also expanded the domestic stability buffer’s range: The previous maximum level was 2.5 per cent, but the regulator can now set it anywhere from 0 to 4 per cent.

That means OSFI now has the capacity to raise minimum capital levels even higher. But each increase adds to the capital burden on banks, restricting the amount of money they have to reinvest in their businesses or pay dividends to shareholders.

With Monday’s share sale, the lender said that it is targeting a common equity tier 1 ratio – a measure of the bank’s ability to sustain losses – of at least 11.5 per cent. That is half a percentage point higher than the new minimum threshold set by OSFI, which will be 11 per cent starting on Feb. 1, giving BMO an added margin of safety.

Adding to the pressure on BMO’s capital levels, the bank took a $1.1-billion charge last month after a U.S. court found BMO’s U.S. subsidiary liable for damages in a lawsuit related to one of the largest Ponzi schemes in history. BMO plans to appeal the decision.