DBRS Confirms Bank of Montreal Following Acquisition of Marshall & Ilsley

DBRS has today confirmed the ratings of Bank of Montreal (BMO) and its related entities, including BMO’s Deposits & Senior Debt at AA and Short-Term Instruments at R-1 (high), following the announced acquisition of Marshall & Ilsley Corporation (M&I). All trends are Stable.

The confirmation of BMO’s ratings and trends reflects DBRS’s belief that the acquisition is a good strategic and geographic fit for Harris Bankcorp, Inc. (Harris) and BMO’s sizable domestic franchise, and BMO’s strong financial risk profile also supports the ratings. The combined business will provide BMO’s U.S. Personal and Commercial Banking (P&C) business with much-needed scale and strength, which help offset the increased credit risk, given M&I’s exposure to commercial real estate (CRE), and integration risks associated with the acquisition. BMO does have experience in integrating other retail acquisitions, albeit smaller ones.

In DBRS’s opinion, the acquisition of M&I is consistent with BMO’s desire to grow its U.S. Midwest banking franchise. BMO is achieving scale with the addition of 374 branches in Wisconsin, Indianapolis, Minnesota, Missouri, Kansas and Arizona. The branch network is geographically complementary to BMO’s existing U.S. branch network of 312 branches and will result in a contiguous Midwest footprint. With the transaction, BMO acquires $53.4 billion in assets, including $40.9 billion in loans and $39.3 billion in deposits, as well as the number one deposit market share in Wisconsin. M&I represents 11% of pro forma consolidated assets at October 31, 2010.

Given M&I’s focus on commercial lending, wealth management and community banking, there are synergies that can be derived from the transaction. Cost savings are estimated to be pre-tax $250 million, representing 7.5% of the combined entity and realized over three years. Notwithstanding the fact that revenue synergies have not been factored in, the acquisition is expected to be accretive to earnings per share (EPS) in year two.

DBRS believes there are credit risk concerns given M&I’s CRE concentration, representing 31% of total loans at September 30, 2010. The credit risk is expected to be manageable as the absolute size of this portfolio will be reduced, and BMO believes it has conservatively valued the total loan portfolio given its due diligence. DBRS believes other challenges facing BMO include integration risk, given the size of M&I relative to other acquisitions BMO has made in the past. Partially mitigating this concern is BMO’s breadth of integration experience. Over the medium term, should risk levels and performance of M&I be significantly weaker than anticipated, it may result in negative rating action for BMO.

The acquisition price of $4.1 billion is an all-stock deal to be financed with BMO common shares. The deal is expected to close during fiscal Q3 2011, subject to regulatory and M&I shareholder approval. Giving consideration to BMO’s additional $800 million issuance to be completed before the close (to support a stronger capital position at BMO), the transaction would have a negative impact on BMO’s Tier 1 ratio of approximately 170 basis points (Basel II) and approximately 110 basis points on the Basel III common equity ratio, but ongoing internal capital generation at BMO should partially temper this effect by the closing date.

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 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, in Chicago.

BMO has four operating groups: Personal and Commercial Banking, Private Client Group, BMO Capital Markets and Corporate Services. 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. Private Client Group incorporates full-service brokerage and direct investing in Canada, North American private banking and investment management; a substantial portion of this operating net income is generated in Canada. BMO Capital Markets services corporate, institutional and government clients in Canada and middle-market clients within select sectors in the United States.

The Bank of Montreal is the fourth largest Schedule 1 bank in Canada, based on total assets ($412 billion) at the end of 2010.

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

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organizations, Rating Bank Preferred Shares and Equivalent Hybrids and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

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