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. DBRS has also discontinued its rating of the Bank’s Cumulative Preferred Shares, because there are none outstanding. 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 in consumer retail banking, 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 generated earnings growth in the first six months (6M) of fiscal 2014. BMO, similarly to other Canadian banks, has benefited from an improvement in credit over the past couple years in both Canada and the United States. The Bank has the largest commercial loan portfolio, relative to its total loan portfolio, of the big six Canadian banks. This may leave BMO more susceptible to credit quality volatility and a reverse in the credit cycle, unless Canadian consumer lending is disproportionally responsible for such a downturn, in which case BMO may potentially fair better. The quality of the Bank’s overall lending portfolio remains strong.

In May 2014, BMO completed the acquisition of F&C Asset Management plc (F&C) through its wholly owned subsidiary, BMO Global Asset Management (Europe) Limited (BMO GAM). DBRS views the transaction as consistent with the Bank’s global asset management strategy plans and F&C is expected to double BMO GAM’s client assets.

Like its other Canadian peers, the Bank has exposure to the Canadian residential mortgage market and other real estate lending. A slowdown in these markets may slow earnings generation, while a downturn in the residential mortgage or commercial real estate markets could hurt asset quality indicators and ultimately have an impact on provisioning levels.

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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (June 2014), Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013) and Criteria: Support Assessment for Banks and Banking Organisations (January 2014), which can be found on the DBRS website under Methodologies.

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

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, or for more information on this industry, please contact us at info@dbrs.com.