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Acquisition of a large bank: is the Bank of Montreal a purchase?


The has assets of around $ 763 billion Bank of Montreal (NYSE: BMO) recently announced its intention to pay $ 16.3 billion in a successful acquisition of Bank of the West, which is the US subsidiary of the French bank BNP Paribas.

The acquisition includes $ 105 billion in assets and will bring Bank of Montreal (BMO) U.S. banking operations to $ 424 billion, making the Canadian bank the eighth largest commercial bank in the United States and the fourth largest commercial bank in North America. Will this great movement benefit shareholders? We will take a look.

Does the agreement make sense?

It is certainly easy to see why BMO is entering into this deal. The presence in the United States is an important part of BMO’s operations, and the acquisition of Bank of the West doubles its presence in the United States. The pro forma bank will have 3.8 million customers and a physical presence in 32 states. Management is very excited that the acquisition gives BMO immediate scale in California, with 5% deposit market share in San Francisco and 2% deposit market share in Los Angeles and San Jose.

In addition, the two banks have fairly similar loan portfolios. Both are heavy on commercial and industrial (C&I) loans, and they have portfolios of residential mortgages, commercial real estate (CRE), and various other types of consumer loans.

Image source: BMO and Bank of the West Investor Presentation.

With the similar loan combinations and the new scale in the US, BMO management really seems to think they can grow the Bank of the West franchise by enhancing it with BMO’s platforms and products. Management said they were excited about the prospects of attracting new business clients to their loan origination and cash management platforms, in which they have invested hundreds of millions of dollars over the years. Bank of the West has also only deployed around 63% of its deposits in the form of loans, so there are plenty of avenues to develop the franchise.

The outline of two people shaking hands with the city in the background.

Image source: Getty Images.

Questions surround the agreement

The purchase price of $ 16.3 billion values ​​the Bank of the West at 150% of tangible book value (TBV, or what a bank would be worth if it were liquidated). It’s not exactly cheap or expensive for a bank acquisition in today’s market. But the cash transaction is funded from multiple sources, including excess capital from BMO, capital generation through earnings by the time the transaction closes, a future increase in common stock of around $ 2.1 billion, as well as approximately $ 2.94 billion of excess West Bank balance sheet capital that will be available to the combined entity upon closing of the transaction.

This last source of financing for the transaction is interesting because this excess capital does not actually come from BMO, but will be sent to the shareholders of BNP Paribas with the other approximately $ 13.4 billion coming from BMO. If you remove that excess capital from the equation, the deal values ​​Bank of the West at around 166% TBV.

Given Bank of the West’s poor performance over the years, analysts when calling banks discussing the deal seemed to think it was a bit pricey, as Bank of the West will only increase earnings per share. BMO than 10% in fiscal 2024 (BMO’s fiscal year ends October 31). And the transaction’s projected internal rate of return, 14%, is certainly lower than what has been seen in other major banking operations in recent years.

It is also a little strange that BMO bought the Bank of the West, which has many branches, while pursuing a thin branch strategy. While the purchase of Bank of the West will expand BMO’s physical presence in 32 states, BMO already has a digital presence in every state. It has 524 branches in the United States and Bank of the West brings 510 more branches to the franchise with very little overlap (the green dots on the map below are the branches of Bank of the West).

Map of BMO and Bank of the West branches.

Image source: BMO and Bank of the West overview.

It would be one thing if management intended to consolidate or close many branches, but said they currently have no plans to close any Bank of the West branches. This surprised me, as BMO expects to cut Bank of the West’s spending base by 35% – which is no small number – so you would think branch closures would be part of the savings. . But management derives most of the savings from centralized overheads and IT efficiency.

Will the acquisition help BMO?

I think it is a bit early to say how this acquisition is going. True, the United States is a big part of BMO’s business, so it makes sense that it is trying to grow, and Bank of the West operates in similar segments. But the deal’s financial metrics aren’t that convincing at the moment, and the decision to keep that many branches doesn’t make much sense. If BMO were to consolidate some of its branches, it would increase cost savings and therefore increase profits, which would make the financial aspects of the transaction more attractive. And you never know: I wouldn’t rule out a branch consolidation in the future.

If management can eventually do some consolidation and realize all the revenue synergies it promises investors, the deal will look a lot better, so it’s going to have to be executed.

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