Investors gave an initial thumbs-down to Bank of Montreal’s huge acquisition in the United States, sending BMO shares down as much as three per cent on Monday. It was a down day for markets generally, but BMO’s shares fell more than any other Big Five Canadian bank stock.
Analysts say there are indeed questions raised by the proposed US$16.3-billion acquisition of Bank of the West that may prompt investors to shy away from BMO shares in the short term. The acquisition requires approval from U.S. regulators, for instance. And – in one big gulp – it will do away with BMO’s sector-leading excess capital position, creating expectations of smaller dividend hikes to come for a while. And BMO has already said it will not buy back shares until the deal closes.
But that doesn’t mean analysts don’t like the deal and the opportunities for growth in the U.S. market it offers to BMO.
Darko Mihelic, an analyst at RBC Capital Markets, raised his rating and his target price on BMO shares as a result of the acquisition news. He now rates BMO shares outperform and his price target has moved up to $160 from $154.
“We like this bold deployment of capital and we are upgrading the stock as a result,” he wrote in a report on the Bank of the West deal.
“Bank of the West’s loan mix complements BMO’s existing portfolio and provides a solid base to work from with (an) expanded footprint in the Western and Midwestern parts of the U.S.,” Mihelic said. He added that Bank of the West’s big retail presence in the competitive U.S. banking sector will likely drive BMO to up its game in U.S. retail banking – a space in which he currently considers BMO’s performance as “mediocre.”
Gabriel Dechaine at National Bank of Canada also used the word “bold” to describe the deal. “Fortune favours the bold,” went the headline on his report. “A better M&A outcome than we anticipated.”
Dechaine calculates BMO will have greater sensitivity to interest rates changes after the deal, meaning profit will get a significantly bigger boost as U.S. rates nudge higher. Each 25 basis point rate hike, he said, will now deliver about $180 million in additional pre-tax profit.
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