DBRS Confirms Bank of Montreal at AA, R-1 (high), Stable Trend

DBRS has today confirmed the ratings of Bank of Montreal (BMO or the Bank) and related entities, including the Deposits & Senior Debt at AA and Short-Term Instruments at R-1 (high). All trends are Stable. The ratings and trends are supported by the Bank’s sizable domestic franchise and strong financial risk profile. Although typically not a market share leader, BMO has solid domestic consumer, commercial and wholesale businesses. Additionally, BMO has an opportunity to reap the benefits of a North American personal and commercial banking platform, given the Bank’s growing presence within the United States.

BMO’s integration of its 2011 acquisition of Marshall and Ilsley Corporation (M&I) has thus far proved successful, with the Bank achieving a large portion of the forecasted synergies. The strong credit performance of the acquired portfolio has led to substantial recoveries over the past two years. DBRS notes that while the acquisition of M&I materially increased the scale of BMO’s U.S. operation, it further exposes the Bank to the U.S. economy, real estate market, and interest rate and regulatory environments.

In the current environment of high consumer leverage, BMO has chosen to key in on products that, in management’s opinion, offer good risk-return tradeoffs, and reduced exposure in areas with less attractive risk-adjusted returns. As a result, BMO actively promoted a specific residential mortgage product – a five-year term 25-year amortization fixed-rate mortgage – that it believes has attractive fundamentals and low credit risk. At the same time, the Bank pulled back slightly on unsecured lending, which would likely be the first product to suffer delinquencies if consumer leverage stresses were to materialize, as well as on commercial real estate lending, where BMO has continued to limit the amount of its exposure in this highly competitive market.

DBRS does not expect potential house price depreciation in Canada to result in material losses from the Bank’s real estate secured lending portfolio, notwithstanding the high indebtedness of the average Canadian consumer and significant increases in housing prices in certain sectors of the Canadian real estate market.

BMO’s long-term Deposits & Senior Debt rating of 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.

Notes:
The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (June 29, 2012), DBRS Criteria: Rating Bank Preferred Shares and Equivalent Hybrids (June 29, 2009) and DBRS Criteria: Intrinsic and Support Assessments (February 11, 2009), which can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

For additional information on this rating, please see the DBRS Limited: Banks and Banking Organisations Linking Document by clicking the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: John van Boxmeer
Rating Committee Chair: Kent Wideman
Initial Rating Date: < 1980
Most Recent Rating Update: April 13, 2012