Bank of Montreal is making the biggest acquisition ever by a Canadian bank, throwing almost every bit of spare capital into a US$16.3 billion deal for Bank of the West just as the COVID-19 pandemic roars into its third year.

For Chief Executive Officer Darryl White, the timing couldn’t be better. White had spent years improving his bank’s efficiency and technology, and the coronavirus forced the lender to stockpile capital. It’s now unloading that war chest to buy the U.S. firm from BNP Paribas SA, doubling its retail presence in the country and vaulting it to the fourth-largest North American commercial bank.

“We look at all that and ask, ‘All right, have we ever been better-positioned to do something like this?’” White, 50, said in an interview Monday. “With the combination of our work and our excess capital, the answer is not even close. Few things are as natural as this.”

The purchase of San Francisco-based Bank of the West will give Bank of Montreal 1.8 million new customers, US$105 billion in assets and an active presence in 32 U.S. states. That’s a far bigger undertaking than the 1984 acquisition of Harris Bank that gave the lender its foothold in the Chicago area and the takeover of Marshall & Ilsley a decade ago that allowed it to expand in Wisconsin.

The deal would be the largest acquisition by a Canadian bank on record, not accounting for inflation, topping Toronto-Dominion Bank’s US$8.3 billion takeover of Commerce Bancorp in 2008.  

Bank of Montreal is funding the cash transaction with CUS$13.5 billion (US$10.4 billion) in excess capital it expects to have at closing, along with CUS$3.8 billion in excess capital from Bank of the West and an issuance of about CUS$2.7 billion in common shares. 

The deal will boost adjusted earnings by 10 per cent in fiscal 2024, helped by US$670 million in cost savings, the Toronto-based bank said.

After the deal closes, the company expects to have a common equity tier 1 ratio -- a key measure of the bank’s loan loss-absorbing capacity -- of 11 per cent. That’s well down from its current 13.7 per cent ratio, though still above regulatory minimums. In the meantime, the bank is suspending share buybacks to help keep its cushion intact.


The deal offers Bank of Montreal a chance to buff up its image even more with investors. 

While the bank’s shares are up the most among Canada’s five largest lenders since White took over in November 2017, and are leading the industry this year with a 35 per cent gain, they trade at the second-lowest price-to-earnings multiple, according to data compiled by Bloomberg. Toronto-Dominion Bank trades at the highest, partly because of its U.S. retail bank, which stretches from Maine to Florida.

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Bank of Montreal’s shares have dropped more than 1 per cent every day since Bloomberg first reported on Dec. 16 that the bank had expressed interest in the BNP assets, trailing the eight-member S&P/TSX Commercial Banks Index during that time. The stock fell 1.9 per cent to CUS$131.54 on Monday, a two-month low. 

“I think if you’re a long-term investor, you’re probably comfortable with what’s happened,” Robert Wessel, managing partner of Hamilton Capital Partners, said on BNN Bloomberg Television. “I think the issue for the market is, this is a very large acquisition. It was very different from what was expected. I think the market would have looked for maybe a collection of mid-caps in the Midwest -- things that were smaller, more digestible.”

The deal likely won’t help the shares in the near term and may put investors in a “wait-and-see” mode, Barclays Plc analyst John Aiken said in a note Monday.

“The market’s approval of the deal will hinge on accepting a 35 per cent reduction in Bank West’s cost base, despite not closing any branches,” Aiken said. “Further, BMO’s relative capital advantage has now effectively disappeared overnight, just when it had become a story for the group.”

White said Bank of the West has been “close to the top” of the company’s wish list for years. The talks started months ago and the pace intensified in recent weeks, he said. 

White’s preparations for a U.S. acquisition go back further. White hired Tayfun Tuzun from Fifth Third Bancorp as chief financial officer on Jan. 1, adding a seasoned executive who had helped oversee the regional bank’s takeover of MB Financial Inc.

Bank of Montreal also had started implementing a digital strategy that has helped it gather deposits online from all 50 U.S. states. That system and the digital tools the company has given its bankers will be key in getting the most out of the Bank of the West deal, North American personal and business banking chief Erminia Johannson said on a call with analysts.

“We’ve been punching above our weight in the U.S. by focusing in on those digital-first capabilities,” Johannson said. “That chassis, as I like to call it, really has been and is built for more.”

The deal also bulks up Bank of Montreal’s commercial-banking operations, giving it greater exposure to sectors like technology and vendor leasing. Importantly, it also gives the firm a significant branch and lending operation in California, which has a population similar to Canada’s but an economy that’s almost twice as large and 885,000 affluent households.

White told analysts he sees “no sensible reason” that the deal won’t win regulatory approval because it poses no competition issues, doesn’t concentrate deposits and doesn’t raise financial-stability concerns, he said. Bank of the West would be swapping one foreign owner for another. The deal requires approval from U.S. and Canadian regulators. 

As for the timing, White said he’s looking beyond current surge in omicron-variant cases and is confident Bank of Montreal can deliver on its earnings promises when the deal closes, expected about a year from now.

“Does omicron today affect the decision? The answer is not at all, really,” White said. “Because what we’re thinking about is our ability to compete and serve customers in year two to 200. It fundamentally takes our U.S. franchise to a different level of competitiveness over that period of time."