Bank of Montreal expands its presence in the United States with the purchase of Bank of the West from BNP Paribas for $ 16 billion

TORONTO / PARIS, Dec. 20 (Reuters) – The Bank of Montreal announced on Monday that it would acquire BNP Paribas’ US unit (BNPP.PA), Bank of the West, for $ 16.3 billion as part of its biggest ever transaction, allowing the Canadian lender to double its footprint in the world’s largest economy, while giving France’s largest bank enormous transaction firepower.

The deal gives BMO, Canada’s fourth-largest lender, a large-scale presence in California, which has a population larger than the bank’s home country. It will add 1.8 million customers, increase the US contribution to the adjusted total before provision, profit before tax to 44% from 36% in fiscal 2021, and give the Canadian bank the ability to deploy almost -total of its excess capital, which was a brake on returns.

Analysts hailed the deal as positive for BMO, which made no secret of its ambitions to build on its current presence in the United States. It has operated there for decades, from its acquisition of Harris Bank in 1984 to transactions such as its 2011 takeover of Marshall & Ilsley Bank.

This market, however, has turned out to be less and less attractive to European lenders, and BNP Paribas is struggling to keep up with big rivals in retail banking. BBVA (BBVA.MC) sold its US business to PNC Financial Services Group Inc in 2020 and HSBC Bank (HBABU.UL) earlier this year sold most of its US business to Citizens Financial Group Inc (CFG.N).

For these banks, “their whole organization was what they sold,” BMO CFO Tayfun Tuzun told Reuters. “We already have a very large presence in the United States and have invested in this organization for an opportunity like this … This company has been on our radar screen for a long time.”

But the deal comes at a time when US President Joe Biden’s administration is pushing regulators, including the Federal Reserve, to take a tougher line on mergers in the economy, fearing that lower competition could hurt. to ordinary Americans.

BMO CEO Darryl White told investors on a conference call Monday that he saw “no reasonable reason” for the bank not to get the green light from US regulators. He noted that the Fed’s approval of three pending deals on Friday was a positive sign.

“While BMO expects the deal to be concluded by the end of next year, regulatory uncertainty exists,” Barclays analysts wrote in a note.

BMO stock fell 2.5% to C $ 131.75 Monday afternoon, on track to close its lowest level since mid-October. They have lost more than 6%, including Monday’s drop, since rumors of the deal surfaced last week. BNP Paribas shares closed up nearly 0.5% on Monday.

The acquisition allows BMO to further reduce its relatively low exposure to the Canadian household sector, where “borrowing capacity is somewhat limited,” while capitalizing on an attractive growth opportunity in the United States, said the Edward Jones analyst James Shanahan in a note.

The Canadian bank expects “significant” revenue synergies from the deal, which will be further quantified in the coming weeks, the executives said on a conference call.

“BMO is paying a fair price for the Bank of the West franchise,” Shanahan said, noting that the deal will increase profits by about 10% in fiscal 2024, and that BMO plans to phase out 35% of operating expenses without closing branches. .

But analysts at Credit Suisse and Keefe, Bruyette & Woods (KBW) said the sale price of $ 16 billion was higher than many analysts had expected.

“Achieving this award for Bancwest is clearly positive for shareholders and gives BNPP some strategic option, which is a rare thing for European banks,” KBW wrote.

EUROPEAN FOCUS

BNP Paribas bought Bank of the West in 1979 and the unit had been its largest business outside of Europe. The sale will leave the French bank to focus directly on Europe, where it is growing as one of the region’s largest investment banks as local competitors stall. Over the past two years, she has taken over blue chip private equity and brokerage businesses from Deutsche Bank (DBKGn.DE) and Credit Suisse (CSGN.S).

BNP said it would use the proceeds to fund more share buybacks, fund targeted acquisitions and further develop its presence in Europe and the United States.

BMO has approximately C $ 9.7 billion in excess capital, said Shanahan – amassed during the pandemic following a March 2020 moratorium on capital redistributions by Canada’s financial regulator which was lifted last month – which will be absorbed by this deal. It will also raise around C $ 2.7 billion through share issuances to fund the transaction, he said.

BMO has suspended its share repurchase program, which it previously announced it would restart, until the deal with West Bank closes at the end of calendar year 2022. more

Reporting by Sudip Kar-Gupta in Paris and Nichola Saminather and Maiya Keidan in Toronto Editing by Megan Davies, Jason Neely and Matthew Lewis

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