DBRS Morningstar Assigns a Provisional Rating of BBB (high), Stable, to the Bank of Montreal’s NVCC Limited Recourse Capital Notes Series 1

DBRS Limited (DBRS Morningstar) assigned a provisional rating of BBB (high) with a Stable trend to Bank of Montreal’s (BMO or the Bank) NVCC Additional Tier 1 (AT1) Limited Recourse Capital Notes Series 1 (the Capital Notes). DBRS Morningstar assigned the rating equal to the Bank’s Intrinsic Assessment of AA (low) less four rating notches, which is consistent with DBRS Morningstar’s standard notching for capital instruments with contingent risks and its ratings for the Bank’s NVCC Preferred Shares. This is one notch below the rating of BMO’s NVCC Subordinated Debt.

DBRS Morningstar notes that the Office of the Superintendent of Financial Institutions granted Tier 1 capital treatment to the Capital Notes.

RATING DRIVERS
Given the current environment, DBRS Morningstar views an upgrade of BMO’s ratings as unlikely. Over the longer term, a sustained improvement in financial performance in BMO’s U.S. banking operations to levels similar to highly rated U.S. regional bank peers or outperformance by BMO compared with its Canadian bank peers while maintaining its conservative risk profile would lead to an upgrade of the ratings.

The ratings would be downgraded as a result of a sustained deterioration in BMO's asset quality or a prolonged adverse impact from the Coronavirus Disease (COVID-19) pandemic, which would have a significant impact on the Bank's financial performance. An increase in BMO’s risk appetite or a shift toward a potentially more volatile earnings mix including a material increase in the contribution from BMO Capital Markets would result in a downgrade of the ratings.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The Grid Summary Grades for the Bank of Montreal are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Strong; Risk Profile – Strong; Funding & Liquidity – Strong; Capitalization – Strong.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020) https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This rating is endorsed by DBRS Ratings Limited (DBRS Morningstar) for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

This rating concerns a newly issued financial instrument. This is the first DBRS Morningstar rating on this financial instrument.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Robert Colangelo, Senior Vice President
Rating Committee Chair: Michael Driscoll, Managing Director
Initial Rating Date: December 31, 1980

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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