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 its subsidiary BMO Harris Bank National Association (the Bank). Confirmed ratings include the Company’s and Bank’s Issuer & Senior Debt rating of AA (low). 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 7, 2014) 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. BMO Financial’s challenges include below-peer profitability and further capitalizing on the M&I acquisition. As a supported rating with a SA1 designation, BMO Financial’s ratings would likely move in tandem with BMO’s ratings.

In DBRS’s view, the actions taken by BMO historically reinforce the Company’s SA1 designation and have raised the importance of the U.S. to the overall franchise. DBRS notes that loans in the U.S., which primarily relate to BMO Financial, comprise approximately 25% of BMO’s total loan portfolio compared to approximately 16% prior to the 2011 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, 2014, the Company’s loan to deposit ratio was 78% as core deposits more than funded its loan portfolio. Additionally, capital levels are solid, placing the Company in good shape to meet Basel III capital requirements. The Bank of Montreal has injected additional capital as needed and most recently three years ago to facilitate the M&I acquisition. Capital ratios as of March 31, 2014 include a Tier I Common Capital (CET1) of 11.38%. DBRS notes that the Bank of Montreal has not taken a cash dividend out of the holding company allowing capital to build through earnings 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 seen improving levels of profitability over the last two calendar years earning a 0.40% and 0.58% ROA for 2012 and 2013, respectively. 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 40% of revenue.

The Company’s asset quality metrics continue to show improvement. Based on regulatory filings, at March 31, 2014, nonperforming assets (NPAs) represented 2.79% of total loans and other real estate owned, improved from 3.00% at YE13. Meanwhile, net charge-offs (NCOs) were 0.44% for 1Q14, improved from 0.61% for 2013 and 1.15% for 2012. While M&I had considerable asset quality problems prior to the acquisition, DBRS notes the acquired loans were fair valued at acquisition and have performed better than initially expected.

BMO Financial Corp., a bank holding company headquartered in Chicago, reported $114.5 billion in assets at March 31, 2014. 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 Wealth Management, 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 (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities - Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include company documents 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.

Lead Analyst: John Mackerey
Rating Committee Chair: Roger Lister
Initial Rating Date: 30 June 2010
Most Recent Rating Update: 11 July 2013

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