BMO gets green light on Bank of the West takeover; TD waiting on approval of First Horizon deal

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Bank of Montreal’s BMO-T major takeover of California-based Bank of the West has received the final green light from U.S. regulators, shifting the attention to another pending deal by Toronto-Dominion Bank TD-N that will expand its footprint further south of the border.

Regulators approved BMO’s takeover of the lender from BNP Paribas BNPQY on Tuesday, ushering in the final stage of the largest purchase of a U.S. bank by a Canadian lender after the deal bumped up against costly deadline delays and heightened scrutiny.

As TD navigates its deal to scoop up Tennessee-based First Horizon Corp., FHN-N the bank is also facing mounting criticism of financial mergers in the United States. The scrutiny is prolonging some of the most transformative deals in the sector’s history.

The U.S. Federal Reserve and the Office of the Comptroller of the Currency announced Tuesday evening that the regulators had approved BMO’s US$16.3-billion deal, creating the 15th-largest commercial bank in the United States.

Closing the deal took longer than BMO anticipated. During the announcement of its fourth-quarter earnings at the end of December, BMO changed its expected closing date to buy Bank of the West from the end of 2022 to the first quarter of this year. With the merger now approved by regulators, BMO expects the deal to close on Feb. 1.

TD also pushed back its timeline from closing its US$13.4-billion purchase of First Horizon from the first fiscal quarter to the first half of its 2023 fiscal year.

But the bank also missed a Nov. 27 deadline. Since the deal did not close by that date, TD has to pay First Horizon a premium equal to 5.4 cents a share each month until the closing. That means the bank is paying about US$29-million each month for a total of approximately US$144.9-million if the deal closes by April 30.

While the premium is relatively small compared to the size of the deal, more critical regulatory decision-making on bank combinations has boosted uncertainty around closing timelines.

“The final one is the regulatory approvals by the major agencies in the U.S.,” Bharat Masrani, TD’s chief executive, said at a conference hosted by Royal Bank of Canada on Jan. 9. “That is an unknown. The latest deals seem to take longer than it used to.”

Meanwhile, RBC is in the early stages of the biggest domestic banking deal in Canadian history, its $13.5-billion takeover of HSBC Bank Canada, the seventh-largest bank in the country by assets. The deal, announced in late November, still requires approvals from the Competition Bureau, the Office of the Superintendent of Financial Institutions, or OSFI, and the federal finance minister. The question remains as to whether the deal will be seen as unfairly reducing competition, a key reason the federal government blocked previous merger efforts in the banking sector in 1998.

U.S. regulators have become more critical of bank mergers since President Joe Biden issued an executive order in 2021, demanding stricter reviews of combinations in the sector. As a result, both BMO and TD have faced opposition from stakeholders pushing the banks to commit to community support and boost access to credit for underserved and minority groups in their new markets.

Four months after a hearing with U.S. regulators in July, BMO unveiled its plan to commit US$40-billion to underserved communities, largely focused near Bank of the West’s operations in California, to calm concerns among community groups and regulators.

“We look forward to working with communities across our expanded U.S. footprint to help drive meaningful change at the local level through a strong combination of financial and community-driven investment,” BMO’s U.S. chief executive David Casper said in a statement Tuesday.

TD faces a similar situation. In a hearing with U.S. regulators last August, the bank faced criticism from some community groups on its lending practices for Black and Latino clients.

Mr. Masrani said the bank is still negotiating with stakeholder groups on its community benefits plan as it moves through U.S. regulatory approvals. “We haven’t signed one yet, but it’s going pretty well and I expect us to get there on that,” Mr. Masrani said at the conference.

As the deals wound their way through a tighter approvals process, BMO also found itself in need of more money after Canada’s banking regulator, OSFI, in December raised the amount of money the lenders must hold, tightening the capital available for acquisitions.

To cushion the financial blow of its acquisition, BMO issued two share sales in less than a year. In March, it raised $2.7-billion to help fund the deal. The lender then sold $3.35-billion in shares in December to boost its capital reserves.

In turn, that share offering has also weighed on the value that shareholders expected to gain from the acquisition. With more shares flooding the market, investors will reap less reward on a per-share basis once BMO starts recording profit from Bank of the West’s operations.

The deal was supposed to boost earnings per share by 10 per cent in 2024, but that figure has dropped to about 6 per cent, RBC analyst Darko Mihelic said in a note to clients in December.