BMO’s asset manager for Europe, the Middle East and Africa, or EMEA, is mostly concentrated in Europe with US$124-billion of assets under management, but has offices in North America, Abu Dhabi and Hong Kong. Ameriprise will pay £615-million (about $1.09-billion), and the deal is expected to close in the fourth quarter this year, subject to regulatory approvals.
The return BMO was earning from the business does not appear to have matched the cost of running it. If the deal closes, BMO said it will not have a significant impact on future profits. But it will boost the bank’s efficiency ratio – a metric BMO’s investors watch closely that measures expenses relative to revenue – by 64 basis points (100 basis points equal one percentage point).
The sale is the largest in a series of recent divestitures BMO has made in its drive toward greater efficiency. BMO hopes to concentrate more of its resources on business lines where it has better prospects of earning a strong return, including its North American asset management business, especially in Canada. In January, BMO sold its Asian private-banking business, and a month earlier, the bank announced its investment dealer would exit the energy sector in the U.S.
Over the past two years, BMO’s efficiency ratio has improved to 56.7 per cent as of Jan. 31 from 63.6 per cent at the end of the first quarter of 2019, thanks in part to broad restructuring programs.
Selling its European asset manager “enables us to focus our resources where we have a competitive advantage and are well-positioned to deliver growth and accretive returns,” Joanna Rotenberg, group head of BMO wealth management, said in a statement.
The EMEA business at BMO was built on the bank’s 2014 acquisition of British-based investment manager F&C Asset Management for £708-million ($1.3-billion at the time). The sale price for Monday’s deal with Ameriprise is lower, representing 0.7 per cent of assets under management.
“We believe the relatively low multiple reflects the unit’s low profitability,” Gabriel Dechaine, an analyst at National Bank Financial Inc., said in a note to clients. “The sale is a reversal of the F&C acquisition strategy, which we admit was a head scratcher at the time it was announced.”
On closing, BMO’s key capital level – as measured by its common equity Tier 1 ratio – is expected to increase by 29 basis points, which would give the bank one of the largest capital reserves among its peers. That would also give BMO added room to reinvest in its existing businesses. “A material boost to BMO’s capital ratios in exchange for a small hit to profits is a good trade-off, especially if BMO can redeploy the proceeds more efficiently down the road,” Mr. Dechaine said.
The deal also marks the start of a new strategic relationship with Columbia Threadneedle Investments, the global asset management arm of Ameriprise. It includes a provision to move some of BMO’s U.S.-based asset management clients to Columbia Threadneedle, if they agree to it. And the two companies will enter a relationship whereby Columbia Threadneedle can offer investment solutions to BMO’s North American wealth management clients. The terms of those arrangements were not disclosed.
In accordance with accounting rules, BMO expects to record a writedown of $745-million of goodwill in its fiscal second quarter, which ends Apr. 30. That charge, combined with the minimal anticipated impact on BMO’s earnings, “suggest that the international asset manager has seen declining profitability over time,” Paul Holden, an analyst at CIBC World Markets Inc., said in a research note.
“In our view, concentrating on the North American market and Canada in particular is the right strategic decision,” he said.
BMO Capital Markets and Morgan Stanley Canada Ltd. acted as financial advisers in the deal, and Norton Rose Fulbright LLP and Linklaters LLP served as legal counsel.
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