US expansion hits bad timing

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Bank of Montreal made a big splash when it acquired BNP Paribas’ US unit Bank of the West for $16.3bn in December 2021. The deal, the biggest ever for the Canadian bank, more than doubled the lender’s footprint in the US and catapulted it into becoming the number 13 bank in the country by assets.

The logic behind the deal may be sound. The timing, it turned out, was not. BMO closed the acquisition in February this year. A month later, the collapse of Silicon Valley Bank convulsed the US regional banking sector and triggered deposit flight. Banks, particularly regional lenders, are contending with sharply higher funding costs, while interest rate rises are sapping loan growth.

All this has made for a tough couple of quarters for the once high-flying BMO. Return on tangible common equity tumbled to 8.2 per cent for the fiscal year that ended in October, down from 25.1 per cent a year ago.

Like other banks, BMO is socking more money away for potentially bad loans. Provisions for credit losses rose nearly C$1.9bn to C$2.2bn (US$1.6bn) for the year. But it also had to absorb more than C$1.5bn in after-tax acquisition and integration costs, the bulk of which is related to Bank of the West.

This means, despite benefiting from higher net interest income, overall net income for the fiscal year came in at just C$4.4bn, compared with C$13.5bn a year ago.

Shares in BMO have fallen 16 per cent over the past 12 months, compared with the 0.8 per cent decline for the broader Toronto Stock Exchange. Its book value has come down from a peak of 1.8 times in 2022 to about 1.1 times. 

Yet investors should take heart from the more than $800mn in cost savings now expected from the Bank of the West acquisition, up by 20 per cent from initial forecasts. Expanding its presence in the US will provide BMO with a hedge against the Canadian consumer banking market. That is bracing for a shock as more than $186bn of mortgages are set for renewal at higher rates in 2024.