DBRS Confirms BMO Financial Corp. at AA (low); Trend Stable

DBRS, Inc. (DBRS) has today confirmed all ratings of BMO Financial Corp. (BMO Financial or the Company) and all related entities including BMO Harris Bank National Association. The trend on all ratings remains Stable. The ratings action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

The Company’s ratings reflect its important role in Bank of Montreal’s (BMO – rated AA with a Stable trend and last reviewed on July 9, 2013) overall North American strategy. Moreover, DBRS believes that BMO has the resources and motivation to support BMO Financial, if needed. The ratings also take into account the Company’s solid Midwest banking franchise, which is underpinned by a strong core deposit base. Challenges include below-peer profitability, successfully executing on the M&I acquisition, and working through remaining asset quality issues. As a supported rating with a SA1 designation, BMO Financial’s ratings are expected to move in tandem with BMO’s ratings.

In DBRS’s view, the actions taken by BMO over the recent past have reinforced the Company’s SA1 designation and have raised the importance of the United States to the overall franchise. DBRS notes that BMO Financial’s loans comprise approximately 21% of BMO’s total loan portfolio compared to approximately 16% prior to the M&I acquisition.

The balance sheet remains solid with strong levels of liquid assets and is underpinned by a robust, low cost deposit base. At March 31, 2013, the Company’s core deposits more than funded its loan portfolio. Additionally, capital levels are solid placing the Company in good shape to meet the Basel III capital implementation. The Bank of Montreal has injected additional capital as needed and most recently to facilitate the M&I acquisition. Capital ratios as of March 31, 2013 included a leverage ratio of 7.33%, a Tier 1 common risk-based ratio of 10.47% and total risk–based ratio of 15.42%. Bank of Montreal has not taken a cash dividend out of the holding company allowing capital to build through earning retention.

Profitability continues to be below that of similarly-sized banks although purchase accounting, restructuring and integration costs have impacted profitability in recent periods. On a regulatory basis, the Company, which lost money during the financial crisis, has been modestly profitable over the last three calendar years and 1Q13 earning a 0.40% ROA for 2011 and 2012 and a 0.25% ROA for 1Q13. BMO Financial’s strong level of liquidity contributes to a relatively thin NIM. However, the Company does have solid levels of non-interest income, which accounts for approximately 35% of revenue.

The Company’s asset quality metrics remain elevated. Based on regulatory filings, at March 31, 2013, nonperforming assets (NPAs) to total loans and OREO was 4.08%, at relatively the same level as YE12. Meanwhile, net charge-offs (NCOs) were 0.70% for 1Q13, improved from 1.15% for 2012 and 1.09% for 2011. While M&I had considerable asset quality problems prior to the acquisition, DBRS notes the acquired loans have been fair valued at CAD$29 billion. This valuation includes a write-down for estimated future losses of CAD$3.5 billion (which DBRS views as conservative) that followed a comprehensive loan portfolio review including input from two independent specialist firms.

BMO Financial Corp., a bank holding company headquartered in Chicago, Illinois, reported $122.4 billion in assets at March 31, 2013. By Bank of Montreal segmentation, BMO Financial includes portions of the Personal & Commercial Banking U.S. segment, as well as activity from other segments including the Private Client Group, BMO Capital Markets and Corporate Services.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other applicable methodologies include the DBRS Criteria: Intrinsic and Support Assessments, and DBRS Criteria: Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments. These can be found at: http://www.dbrs.com/about/methodologies.

The sources of information used for this rating include company documents, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

[Amended on August 27, 2014, to reflect actual methodologies used.]

Lead Analyst: John Mackerey
Rating Committee Chair: William Schwartz
Initial Rating Date: 30 June 2010
Most Recent Rating Update: 8 November 2011

For additional information on this rating, please refer to the linking document under Related Research