DBRS Correction: Bank of Montreal Confirmed at AA and R-1 (high), Stable Trend

In the DBRS press release published on June 28, 2010, in which the ratings of Bank of Montreal (BMO or the Bank) and its related entities were confirmed, including BMO’s Deposits & Senior Debt at AA and Short-Term Instruments at R-1 (high), the BMO Tier 1 Notes – Series A rating of BMO Capital Trust II should also have been confirmed at “A” with a Stable trend.

The full press release and rating table appear below.

DBRS has today confirmed the ratings of Bank of Montreal (BMO or the Bank) and its related entities, including BMO’s Deposits & Senior Debt at AA and Short-Term Instruments at R-1 (high). All trends are Stable. The ratings and trends are supported by BMO’s sizable domestic franchise and its financial risk profile. BMO has solid domestic consumer, commercial and wholesale businesses.

The Bank has been trying to grow market share in its retail bank by using a customer-focused approach to banking, including investments in technology and staff for client-facing activities. Significant gains will take time, given the necessary shift in the Bank’s culture, but there are positive signs, such as improving customer service scores. Year-over-year market share results have been favourable for personal deposits and business loans, while the Bank’s market shares for mortgages and for personal loans continue to decline, the result of management actions. The rate of decline in mortgages is slowing as the mortgage-broker-originated portfolio runs off. Management’s desire to maintain the quality of the personal loan book resulted in market share decline from Q1 2009 to Q3 2009, but there sequential growth began in Q4 2009. DBRS believes any meaningful gains in both these asset categories will be challenging, given the focus by the Bank’s competitors to do the same.

Actions taken by BMO, coupled with deteriorating credit performance at a number of its Canadian bank peers, have placed the Bank’s credit performance closer to the industry average, following worse-than-average performance in fiscal 2008 and H1 2009. It appears that BMO was provisioning early in the credit cycle, but it is difficult to determine whether there has been a change in posture from the historical conservative lending culture.

BMO continues to make progress in controlling risk, following the implementation of changes to its risk management system in 2008. Evidence includes the reduction in levels of risk in the trading business, with trading revenue as a percentage of operating revenue at the bottom end of its Canadian banking peers and market-risk risk-weighted assets as a percentage of total risk-weighted assets at or below the Canadian bank peer group average.

BMO’s long-term Deposits & Senior Debt rating at AA is composed of an intrinsic assessment of AA (low) and a support assessment of SA2 (reflecting the expectation of systemic and timely external support by the government of Canada). The SA2 status results in a one-notch benefit to the senior debt and deposits and the subordinated debt ratings, which benefit from this implied support.

BMO is a full-service Canadian bank with a sizable established U.S. retail-banking franchise through its wholly owned subsidiary, Harris Bankcorp, Inc., in Chicago.

BMO has four operating groups: Personal and Commercial Banking, Private Client Group, BMO Capital Markets and Corporate Services, accounting for 64%, 16%, 34% and negative 14%, respectively, of DBRS-adjusted operating net income in H1 2010.

Personal and Commercial Banking serves more than eight million retail customers in Canada and the United States. P&C Canada remains the substantial contributor to the segment. In H1 2010, P&C Canada and P&C U.S. accounted for 89% and 11%, respectively, of Personal and Commercial Banking’s operating net income. Private Client Group incorporates full-service brokerage and direct investing in Canada and private banking and investment management in North America, with a substantial portion of its operating net income generated in Canada. BMO Capital Markets services corporate, institutional and government clients in Canada and middle-market clients in select sectors in the United States.

The Bank of Montreal is the fourth largest Schedule 1 bank in Canada, based on total assets ($390 billion) at the end of Q2 2010.

Notes:
All figures are in Canadian dollars unless otherwise noted.

DBRS ratings for Bank of Montreal Mortgage Corp. are based on the unconditional guarantee of Bank of Montreal.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations, Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessment, Rating Bank Subordinated Debt and Hybrid Capital Instruments with Contingent Risks, Rating Bank Subordinated Debt and Hybrid Capital Instruments with Discretionary Payments and Rating Bank Preferred Shares and Equivalent Hybrids, which can be found on the DBRS website under Methodologies.

This is a Corporate (Financial Institutions) rating.