Bank of Montreal is making a major splash in the United States with a cash deal to buy Bank of the West for a total purchase price of $20.9-billion, an acquisition that will boost BMO’s American assets by 63 per cent and shift its U.S. geographic base away from the Midwest and toward California.
San Francisco-based Bank of the West is currently owned by French giant BNP Paribas , which is exiting the U.S. retail and commercial banking market with the sale. After adjusting for excess capital on Bank of the West’s balance sheet, which is akin to cash that is sitting around, BMO is paying $17.1-billion, making it the largest-ever purchase of a U.S. bank by a Canadian one.
The acquisition price amounts to 1.5 times Bank of the West’s book value, after accounting for the excess capital. A rule of thumb for bank mergers is that anything over two times book value is seen as paying a rich purchase price. According to regulatory filings, Bank of the West generates a return on equity of 7 per cent, while BMO’s equivalent return in the U.S. is 10 per cent.
The purchase price amounts to roughly 20 per cent of BMO’s current stock market value, and will be largely funded with excess capital BMO has sitting around because Canadian regulators prevented banks from boosting dividends or repurchasing shares for much of the COVID-19 pandemic. These restrictions were recently lifted, and BMO has decided to deploy the capital toward future growth.
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The U.S. is currently experiencing a wave of regional bank consolidation as mid-sized lenders bulk up to better compete against the country’s four largest megabanks, which benefit from scale efficiencies and massive technology expense budgets. Recent deals include BB&T Corp.’s US$28-billion all-stock acquisition of SunTrust Banks Inc. in 2019, creating a U.S. southeast powerhouse, and PNC Financial Services Group Inc.’s US$11.6-billion acquisition of BBVA USA Bancshares Inc., the U.S. arm of Spain’s BBVA, completed in 2021.
BMO’s deal is in line with this trend, however, it follows a major jump in U.S. bank valuations, with the KBW Nasdaq Bank Index of stocks in the sector up 32 per cent year-to-date before the purchase was announced.
BMO is also expanding into a region where there is little overlap with its existing operations. Although BMO is doubling the size of its branch network in the U.S. – both banks have roughly 500 branches each – BMO’s branches are predominately located in Illinois and Wisconsin, whereas 70 per cent of Bank of the West’s US$89-billion in deposits are located in California. The bank also has branches in states such as Colorado and Minnesota.
By contrast, BMO’s purchase of Marshall & Ilsley Corp. for US$4.1-billion, completed in 2011, added scale to its existing Midwest footprint, and the purchase was announced in the early days of the economic recovery from the 2008-09 global financial crisis. The timing allowed BMO to purchase M&I cheaply because M&I had a troubled loan book stemming from real estate loans in Florida and Arizona before the crisis.
Yet the new deal will give BMO a solid exposure to the fast-growing West and South in the U.S. Relative to other states, California had one of the lighter hits to gross domestic product in 2020, according to the Bureau of Economic Analysis, and it has been one of the fastest-growing states this year. Illinois, meanwhile, has seen softer growth for much of the past decade.
BMO is also buying a bank with a higher efficiency ratio, a key metric in financial services that measures expenses as a percentage of revenues. Bank of the West’s efficiency ratio is 62 per cent, while BMO’s is 55 per cent in the U.S. If BMO can lower the ratio at Bank of the West, it should boost future earnings.
“We’ve had an interest in this particular bank for a very long time,” BMO chief executive Darryl White said in an interview, adding that often in mergers and acquisitions, “you can’t control your timing.”
While BMO had to wait for a deal, Mr. White said the bank being acquired is, “frankly, better than any opportunity we’ve seen. And we’ve seen a lot of them.”
BMO has also benefited itself from the rise in bank valuations. Before the deal was announced its own shares had climbed 38 per cent since January. BMO’s shares fell 1.9 per cent on the Toronto Stock Exchange Monday.
Bank of the West focuses mostly on consumer and commercial banking, and during an investor call, BMO executives emphasized the commercial opportunities. BMO’s roots are in commercial lending and the bank has been expanding its U.S. commercial business over the past few years by opening offices in metro areas such as Dallas-Fort Worth. Commercial loans comprise 60 per cent of Bank of the West’s loan portfolio, and the new deal will bolster BMO’s business in a way that would take years to build on its own.
“We’ve been in California for over 100 years in the commercial space, but not with the scale they have,” David Casper, U.S. head of BMO Financial Group, said on the call.
As for the retail banking opportunities, BMO said a key goal is to cross-sell acquired clients with existing BMO products, including wealth management offerings.
BMO is also emphasizing cost savings that will come from the acquisition – particularly for technology expenses, because the two banks use a lot of the same vendors.
However, BMO has pledged not to close any acquired branches, which may limit its cost savings. In many bank mergers, branch closings are an important source of cuts.
“No doubt California is an economic juggernaut bigger than all of Canada combined, and Bank of the West has deep roots there. … However, the addition of 514 additional branches (which BMO has pledged not to close despite $860-million in expense synergies) seems like a material change in the bank’s ‘branch-light’ approach,” Bank of Nova Scotia analyst Meny Grauman wrote in a note to clients.
To fund the acquisition, BMO plans to use $9.7-billion of its existing capital, which comes from money sitting on its balance sheet, as well as funds from the sale of its asset management business in Europe, the Middle East and Africa. BMO also expects to generate $3.8-billion in capital over the next year that it will put toward the purchase price – but that money isn’t guaranteed, because economic conditions could affect its profit. Another $2.7-billion will come from selling new shares.
U.S. regulators have recently suggested they are concerned about bank concentration given the recent spate of deals, but Mr. White said BMO is not concerned about getting the necessary approvals. “We think the transaction meets all the requirements for regulatory approval, not just because that would be convenient,” he said on the investor call. To back this up, he cited the minimal concentration of deposits between the two banks, because there isn’t much geographic overlap, and the fact that neither has any financial stability concerns.
BMO first expanded to the U.S. in 1984 by acquiring Chicago-based Harris Bank for $718-million, and doubled down in 2011 by acquiring M&I. Rival Canadian banks have also spent heavily in the U.S. over the past 15 years, with Toronto-Dominion Bank buying Commerce Bancorp Inc. in 2008, Royal Bank of Canada acquiring City National Bank in 2015 and Canadian Imperial Bank of Commerce buying PrivateBancorp Inc. in 2017.
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