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

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), including the Company’s Issuer & Senior Debt rating of AA (low). The trend on all ratings remains Negative. The rating action follows the announcement of the Company’s parent, Bank of Montreal’s (BMO – rated AA with a Negative trend) agreement to acquire the General Electric Capital Corporation’s (GECC) Transportation Finance (TF) portfolio, which has net earning assets of approximately $8.7 billion. The transaction is structured as an asset purchase and is expected to close during BMO’s 1Q16 subject to the satisfaction of antitrust clearance and certain other customary closing conditions.

DBRS’s confirmation is based on the Company acquiring the leading financier to the truck and trailer transportation segment in North America that is complementary to the Company’s existing product offering. Moreover, the asset purchase should help bolster profitability and improve efficiency, both of which have been key challenges for the Company over the past several years. The confirmation also further evidences the Company’s SA1 designation with BMO once again providing capital for U.S. expansion. Lastly, key executives from GECC’s TF business, who have a strong track record managing the business, are expected to be retained as part of the transaction.

The Negative trend reflects DBRS’s view that anticipated changes in Canadian legislation and regulation mean that the potential for timely support for systemically important institutions like BMO is declining and is likely to eventually result in a change in DBRS’s support assessment from SA2 to SA3 for the large Canadian banks including BMO. Currently, the final rating for BMO benefits from an uplift of one notch above their intrinsic assessment (IA) due to the SA2 support assessment. As a supported rating with a SA1 designation, the ratings for the Company will move in tandem with BMO’s rating.

The $8.7 billion TF portfolio is primarily comprised of loans, leases and floor plan lines to commercial clients. On a pro-forma basis, the acquired assets represent approximately 12% of the total loan portfolio, or just over 6% of total assets. Management noted that the assets being purchased fit well within BMO’s risk appetite and is well-diversified by product and geography. Moreover, BMO is taking a prudent credit mark of 1.25%. Positively, the purchase includes GECC’s TF technology platform and proven credit scoring model that are superior to those currently in place at the Company.

Although the balance sheet currently has excess deposit funding, the large asset purchase will pressure funding metrics and modestly increase the use of wholesale funding. The Company plans to put more focus on deposit gathering after not needing the funding over the past several years, as well as pull back on its indirect auto originations to free up further funding.

On a pro-forma basis, capital should remain strong, as the Company was already soundly capitalized.

BMO Financial Corp., a bank holding company headquartered in Chicago, reported $118.1 billion in assets at June 30, 2015. 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 2015). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2015), and DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015).

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: Mike Driscoll
Rating Committee Chair: Roger Lister
Initial Rating Date: 30 June 2010
Most Recent Rating Update: 20 May 2015

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