Why BMO Financial (BMO) Is Buying Bank Of The West For $16.3 Billion

By Amit Chowdhry ● Dec 20, 2021
  • BMO Financial announced it is buying Bank of the West and its subsidiaries. These are the details.

BMO Financial Group (TSX: BMO) (NYSE: BMO) and its indirect wholly-owned Chicago-based subsidiary BMO Harris Bank N.A. (BMO) recently announced the signing of a definitive agreement with BNP Paribas (XPAR: BNP) to buy Bank of the West and its subsidiaries, with assets as of September 30, 2021, of approximately C$135 billion (US$105 billion). This acquisition aligns with BMO’s strategic, financial and cultural objectives.

As part of the deal, BMO will buy Bank of the West for a cash purchase price of US$16.3 billion, or US$13.4 billion net of estimated US$2.9 billion of excess capital (at closing) at Bank of the West. BMO will fund the transaction primarily with excess capital reflecting its strong capital position and anticipated capital generation.

Founded in 1874, Bank of the West has a strong track record of serving retail, small business, commercial and wealth clients. And with the combination of two highly complementary geographies and building upon BMO’s digital, data and analytics capabilities, this acquisition enables a contiguous market extension, the acceleration of BMO’s commercial banking expansion, and highly competitive scaled entry into California.

Upon the deal closing, the acquisition will bring nearly 1.8 million customers to BMO and will further extend its banking presence through 514 additional branches and commercial and wealth offices in key U.S. growth markets. And post-closing, BMO will have a strong position in 3 of the top 5 U.S. markets, a footprint in 32 states, expanded national specialty commercial businesses, and a digital banking platform gathering deposits in all 50 states.

With about 70% of Bank of the West’s deposits in California, BMO is making a scaled entry to a market with a population of approximately 40 million people producing US$3.1 trillion of GDP – which if considered as a country, would rank as the world’s 5th largest economy.

The deal is expected to be immediately accretive on closing to BMO’s adjusted earnings per share and over 10% accretive in 2024, including estimated cost synergies. And the estimated internal rate of return is approximately 14%.

The purchase price is estimated at 1.5 times Bank of the West’s expected tangible common book value based on the estimated balance sheet at close. And BMO expects to incur pre-tax merger and integration costs of approximately C$1.7 billion and achieve pre-tax cost savings of approximately C$860 million, or 35% of Bank of the West’s non-interest expenses, through operational efficiency improvements with 100% of the cost savings executed by the end of the first year after closing.

The acquisition adds about US$56 billion of loans and US$89 billion of deposits based on Bank of the West’s September 30, 2021 balance sheet. And BMO expects to take a gross credit mark of C$992 million, or 126 bps of loans, and reflect a C$218 million fair value mark (write-down of equity), both of which will be accreted into adjusted earnings.

BMO expects to fund the deal primarily through excess capital on the combined entities balance sheet at closing, including an estimated C$3.8 billion from Bank of the West and C$13.5 billion from BMO, which includes the benefit from the sale of BMO’s EMEA asset management business and internal capital generation to the estimated closing date. And BMO intends to introduce a 2% discount on shares issued under its dividend reinvestment plan (DRIP) and expects to raise approximately C$2.7 billion of common equity prior to the closing date. BMO is committed to maintaining its target capital ratios and regular dividends within its target payout range. And BMO will not proceed with establishing a normal course issuer bid and does not expect to repurchase shares prior to close.

BMO and BNP Paribas will enter into a long-term distribution agreement for the provision of Equipment Finance and Cash Management solutions to BNP Paribas’ customers in North America. And the transaction, which has been approved by the BMO and BNP Paribas Boards of Directors, is expected to close by the end of calendar 2022, subject to customary closing conditions, including regulatory approvals. Upon closing, BMO intends to merge Bank of the West into BMO Harris Bank N.A.

KEY QUOTES:

“With the strength of our performance and our integrated North American foundation, we have never been better positioned to take this next step in our growth strategy and to deliver for the new customers and colleagues we look forward to welcoming to BMO. This acquisition will add meaningful scale, expansion in attractive markets, and capabilities that will enable us to drive greater growth, returns, and efficiencies.”

“We will deliver a highly competitive offering to new growth markets, combining the strength of our digital banking platform and a strong team of bankers to generate leading customer growth.”

“Breaking down barriers to inclusion is a driving force for both banks – it’s a commitment central to BMO’s Purpose, to Boldly Grow the Good in business and life. Both BMO and Bank of the West have achieved “Outstanding” Community Reinvestment Act ratings, supported by robust commitments to investing in our communities. We’ll be well-positioned to support the communities we serve and to help our customers make real financial progress.”

— Darryl White, Chief Executive Officer, BMO Financial Group

“Bank of the West is a well-run and well-respected organization that will bring complementary capabilities, products and segment expertise to BMO, all of which are accretive to our existing franchise. Combining these strengths with BMO’s proven track record of executing and integrating acquisitions will position us to leverage our capabilities to serve more personal, business, commercial and wealth customers. It’s also a great opportunity to build upon our strong track record of engaging with communities where we operate.”

— David Casper, Group Head, North American Commercial Banking and U.S. Chief Executive Officer, BMO Financial Group

“On behalf of all of my colleagues at Bank of the West, I am excited for what this new opportunity will bring for our customers, our employees, and our longstanding community partners. Bank of the West’s presence in many of the largest and fastest-growing markets in the U.S. provides an ideal and complementary commercial and retail banking platform to fuel BMO’s growth. Combined with BMO’s suite of products and capabilities we’ll be able to help even more customers achieve real financial progress. Our team of dedicated commercial and business bankers will be a great fit with BMO, working on creative solutions to match individual needs.”

— Bank of the West CEO Nandita Bakhshi