By Nichola Saminather and Sudip Kar-Gupta
TORONTO/PARIS (Reuters) -Bank of Montreal said on Monday it will buy BNP Paribas' U.S. unit, Bank of the West, for $16.3 billion in its biggest deal ever, allowing the Canadian lender to double its footprint in the world's biggest economy, while giving France's largest bank a huge step up in firepower for deals.
The deal gives BMO, Canada's fourth-largest lender, a large-scale presence in California, whose population is bigger than the bank's home country. It will add 1.8 million customers, increase the United States' contribution to total adjusted pre-provision, pretax earnings to 44% from 36% in fiscal 2021 and give the Canadian bank the ability to deploy almost all of its excess capital, which has been a drag on returns.
Analysts hailed the deal as a positive for BMO, which has made no secret of its ambitions to build on its existing presence in the United States. It has operated there for decades, from its acquisition of Harris Bank in 1984, to deals including its 2011 takeover of Marshall & Ilsley Bank.
That market, however, has proven increasingly unattractive for European lenders, and BNP Paribas has been struggling to keep up with larger retail banking rivals. BBVA sold its U.S. operations to PNC Financial Services Group Inc in 2020 and HSBC Bank earlier this year sold most of its U.S. business to Citizens Financial Group Inc.
For these banks, "their entire organization was what they sold," BMO's chief financial officer, Tayfun Tuzun, told Reuters. "We already have a very sizeable presence in the U.S., and have been investing in that organization in anticipation of an opportunity like this ... This company has been on our radar screen for a long time."
But the deal comes at a time when the administration of U.S. President Joe Biden is pushing regulators, including the Federal Reserve, to take a tougher line on mergers across the economy amid worries that declining competition is hurting everyday Americans.
BMO's CEO, Darryl White, told investors on a conference call on Monday that he saw “no sensible reason” the bank would not obtain the green light from U.S. regulators. He noted the Fed's approval of three outstanding deals on Friday was a positive sign.
“While BMO is anticipating that the deal should be closed by the end of next year, regulatory uncertainty does exist,” Barclays analysts wrote in a note.
BMO shares were down 2.5% at C$131.75 on Monday afternoon, on track for their lowest close since mid-October. They have lost more than 6%, including Monday's drop, since rumours of the deal surfaced last week. BNP Paribas shares closed up almost 0.5% on Monday.
The acquisition allows BMO to further reduce its comparatively low exposure to the Canadian household sector, where "borrowing capacity is somewhat limited," while capitalizing on an attractive U.S. growth opportunity, Edward Jones analyst James Shanahan said in a note.
The Canadian bank expects "meaningful" revenue synergies from the deal, which will be further quantified in coming weeks, executives said on a conference call.
"BMO is paying a fair price for the Bank of the West franchise," Shanahan said, pointing out that the deal will lift earnings by about 10% in fiscal 2024, and that BMO expects to eliminate 35% of operating expenses without closing any branches.
But analysts at Credit Suisse and Keefe, Bruyette & Woods (KBW) said the $16 billion sale price was higher than many analysts had forecast.
"Achieving this price for Bancwest is a clear positive for shareholders and gives BNPP some strategic optionality, which has been a rare thing for European banks," wrote KBW.
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 focused squarely on Europe, where it is growing in stature as one of the region's biggest investment banks as local rivals stall. In the past two years it has taken on equity and prime broking businesses from Deutsche Bank and Credit Suisse.
BNP said it would use the proceeds from the sale to fund more share buybacks, to finance bolt-on acquisitions and further develop its presence in both Europe and the United States.
BMO has excess capital of about C$9.7 billion, Shanahan said - amassed during the pandemic following a March 2020 moratorium on capital redistributions by Canada's financial regulator that was lifted last month - which will be absorbed by this deal. It will also raise about C$2.7 billion through equity issuances to fund the deal, it said.
BMO put its share repurchase program, which it previously said it would restart, on hold until the Bank of the West deal closes at the end of calendar 2022.
(Reporting by Sudip Kar-Gupta in Paris and Nichola Saminather and Maiya Keidan in TorontoEditing by Megan Davies, Jason Neely and Matthew Lewis)