BMO to double its U.S. presence by buying Bank of the West

Bank of Montreal (BMO) said on Monday it will buy BNP Paribas' U.S. unit,Bank of the West, for $16.3 billion USin its biggest deal ever,allowing the Canadian lender to double its footprint in theworld's biggest economy, while giving France's largest bank ahuge step up in firepower for deals.

The deal gives BMO, Canada's fourth-largest lender, alarge-scale presence in California, whose population is biggerthan the bank's home country. It will add 1.8 million customers and give BMOthe ability to deploy almost all ofits excess capital, which has been a drag on returns.

Analysts hailed the deal as a positive for BMO, which hasmade no secret of its ambitions to build on its existingpresence in the United States. It has operated there fordecades, from its acquisition of Harris Bank in 1984, to dealsincluding its 2011 takeover of Marshall & Ilsley Bank.

That market, however, has proven increasingly unattractivefor European lenders, and BNP Paribas has been struggling tokeep up with larger retail banking rivals. Spanish bank Banco Bilbao Vizcaya Argentaria soldits U.S. operationsin 2020 and HSBC Bank earlier this year sold most ofits U.S. business, too.

For these banks, "their entire organization was what theysold," BMO's chief financial officer, Tayfun Tuzun, toldReuters.

"We already have a very sizeable presence in the U.S.,and have been investing in that organization in anticipation ofan opportunity like this ... This company has been on our radarscreen for a long time."

BMO needsgreen light from U.S. regulators

But the deal comes at a time when the administration of U.S.President Joe Biden is pushing regulators, including the FederalReserve, to take a tougher line on mergers across the economyamid worries that declining competition is hurting everydayAmericans.

BMO's CEO, Darryl White, told investors on a conference callon Monday that he saw "no sensible reason"the bank would notobtain the green light from U.S. regulators. He noted the Fed'sapproval of three outstanding deals on Friday was a positivesign.

"While BMO is anticipating that the deal should be closed bythe end of next year, regulatory uncertainty does exist,"Barclays analysts wrote in a note.

The acquisition allows BMO to further reduce itscomparatively low exposure to the Canadian household sector,where "borrowing capacity is somewhat limited," whilecapitalizing on an attractive U.S. growth opportunity, EdwardJones analyst James Shanahan said in a note.

"BMO is paying a fair price for the Bank of the Westfranchise," Shanahan said, pointing out that the deal will liftearnings by about 10 per centin fiscal 2024, and that BMO expects toeliminate 35 per centof operating expenses without closing anybranches.

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

BMO has billions in excess capital

BNP Paribas bought Bank of the West in 1979 and the unit hadbeen its largest business outside of Europe. The sale will leavethe French bank focused squarely on Europe, where it is growingin stature as one of the region's biggest investment banks aslocal rivals stall.

BMO has excess capital of about $9.7 billion, Shanahan said amassed during the pandemic following a March 2020 moratoriumon capital redistributions by Canada's financial regulator thatwas lifted last month which will be absorbed by this deal.