Fitch Ratings has affirmed Bank of Montreal's (BMO) Long- and Short-term
Issuer Default Ratings (IDRs) at 'AA-' and 'F1+', respectively. The
Rating Outlook remains Stable.
This rating action follows Fitch's periodic review of the Canadian Banks
Peer Group, which includes Bank of Montreal (BMO), Bank of Nova Scotia
(BNS), Canadian Imperial Bank of Commerce (CIBC), Caisse Centrale
DesJardins (CCD), National Bank of Canada (NBC), Royal Bank of Canada
(RBC) and Toronto-Dominion Bank (TD).
For more information, please refer to the Canadian Banks Peer Review
Special Report available on www.fitchratings.com.
KEY RATING DRIVERS
IDRs, VRs AND SENIOR DEBT
BMO's rating affirmation and high ratings reflect the company's
consistent financial performance over various credit cycles, sizeable
franchise, and good revenue diversification relative to its peer banks
given its U.S. based operations. BMO's ratings also benefit from
Canada's strong regulatory environment as well as a stable domestic
banking market.
However, Fitch believes that all Canadian Banks, including BMO, are
vulnerable to credit deterioration in their domestic loan portfolios
given pressures on the economy. In particular, Fitch sees that consumer
indebtedness is at record high levels and believes the Canadian housing
market is overvalued by about 20%. Should the rapid decline in global
oil prices cause an economic slowdown in Canada, impacting employment
levels, this could hasten potential credit deterioration. For 2016,
Fitch believes most Canadian banks' earnings will be challenged given
that provisions will likely increase, a persistent low rate environment,
and potentially weaker economic activity in their home market.
Additionally, Fitch would note that BMO's direct exposure to oil & gas
lending appears to be on the lower side compared to other Canadian
banks, but it could still be susceptible to losses should the oil price
decline cause economic weaknesses noted above.
While Canadian Mortgage and Housing Corporation (CMHC) insurance plays
an important role in supporting the balance sheets of all Canadian
Banks, including BMO, the company's large personal instalment and
consumer loan portfolio could also be at risk. At present, this
represents a sizable 23% of the company's Canadian loan portfolio. The
performance of this portfolio will bear monitoring should the Canadian
consumer environment begin to weaken. Fitch notes that excluding HELOCs,
the portfolio would represent 10% of total Canadian loans.
The company's earnings performance for 2015 was good with modest revenue
and net income growth compared to 2014, despite a challenging
environment. BMO has benefited from low credit costs, although
provisions were up by 9% compared to fiscal-year end 2014. While BMO's
ratio of gross impaired loans to loans remains above the average of
Canadian peers, it continues to compare well internationally. For 2016,
the company will likely increase provisions to reflect some credit
deterioration from the decline in oil prices.
During 2015, BMO experienced strong growth in its commercial loan book
in the U.S. of roughly 16% year-over-year. Although Fitch views the
diversity in the loan mix as favourable, growth rates are much higher
than other U.S. large regional peers. Fitch has noted concerns with
rapid growth in C&I lending particularly in light of the aggressive
competition.
BMO's geographic revenue diversification through its U.S. based
operations favourable, and could provide a buffer should the Canadian
operations experience a slowdown from lower oil prices. However, Fitch
notes that BMO's U.S. operations have to date been somewhat dilutive to
the overall enterprise's return on equity (ROE), as it incurs some
additional regulatory and operating costs relative to more domestically
focused banks.
In December 2015, BMO completed its acquisition of General Electric
Capital Corporation's Transportation Finance Business. Although the deal
did not have a material impact to BMO's balance sheet (roughly only 1.7%
of total assets and 3.5% of total loans), capital position is expected
to declined but remained in line with management's capital targets. In
Fitch's view the deal makes strategic sense for BMO given the challenges
most Canadian banks are facing growing loans in their local market, we
have expected asset growth to come from U.S. operations. Additionally,
BMO has articulated its plan to pursue modest acquisitions as a growth
strategy.
Similar to its Canadian peers, Fitch views BMO's funding profile and
liquidity as solid. The company maintains a large portion of assets in
cash and liquid securities. BMO also benefits from a significant amount
of core retail deposits. In addition, BMO's expanded U.S. based retail
franchise diversifies the funding mix and provides relatively low-cost,
sticky deposits.
Fitch believes BMO's capital position is appropriate given its business
mix and balance sheet risks. Further, the company's capital measures are
in-line with other similarly rated global financial institutions, in
Fitch's opinion. Fitch notes that Canadian Banks in general have
risk-weighted assets (RWA) that may be lower given the 0% risk-weight
assigned to mortgage loans that are insured by CMHC. However, OSFI has
announced it plans to enhance its regulatory capital framework of
residential real estate loans including risk sensitive floors to ensure
capital requirements reflect underlying risks, which will likely take
effect by the end of 2017.
SUPPORT RATING AND SUPPORT RATING FLOOR
The affirmation of BMO's Support Rating (SR) of '2' and Support Rating
Floor (SRF) of 'BBB-' reflect Fitch's view that the likelihood of
support remains relatively high for Canadian Banks due to their systemic
importance in the country, significant concentration overall of Canadian
banking assets amongst the institutions noted above, which account for
over 90% of total banking assets, the large size of the banking sector
with banking assets at 2.1x Canada's GDP, and the Canadian banks'
position as key providers of financial services to the domestic economy.
In Fitch's view, Canadian banking authorities through the CDIC Act, have
wide latitude to resolve a troubled bank including re-capitalizing an
institution, creating a bridge bank, or imposing losses on creditors.
Fitch recognizes that the government's willingness to provide support
for D-SIFI's in Canada has been reduced demonstrated by Department of
Finance consultation paper which outlines the proposed bail-in regime as
Canadian banking regulators seek to protect tax payers from the risk of
a large financial institution failing. This is evidenced by the issuance
of non-viability contingent capital (NVCC) instruments, resolution
powers given regulatory authorities under the CDIC Act, and other
initiatives that demonstrate the Canadian government's progress to
reduce the propensity of state support for banks going forward.
BMO's IDRs and senior debt ratings do not benefit from support because
their Viability Ratings (VRs) are all currently above their SRFs.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by BMO and its
subsidiaries are all notched down from the common VR in accordance with
Fitch's assessment of each instrument's respective non-performance and
relative loss severity risk profiles, which vary considerably.
BMO's subordinated debt is notched one level below its VR of 'aa-' for
loss severity in accordance with Fitch's assessment of each instrument's
respective non-performance and relative loss severity risk profiles.
The preferred securities of BMO Capital II are non-cumulative preferred
securities which are notched five below the VR, made up of two notches
down for non-performance and three notches down for loss severity.
LONG- AND SHORT-TERM DEPOSIT RATINGS
BMO Harris, NA's uninsured long-term deposit ratings are rated one notch
higher than the company's IDR and senior unsecured debt because U.S.
uninsured deposits benefit from depositor preference. U.S. depositor
preference gives deposit liabilities superior recovery prospects in the
event of default.
M&I Marshall & Ilsley Bank uninsured long-term deposit ratings are also
rated one notch higher than the company's IDR and senior unsecured debt
because U.S. uninsured deposits benefit from depositor preference. U.S.
depositor preference gives deposit liabilities superior recovery
prospects in the event of default.
SUBSIDIARY AND AFFILIATED COMPANY
All of the subsidiaries and affiliated companies, including BMO Harris
Bank National Association reviewed as part of the Canadian Bank peer
review, factor in a high probability of support from parent institutions
to the subsidiaries. This reflects that performing parent banks have
very rarely allowed subsidiaries to default. It also considers the high
level of integration, brand, management, financial and reputational
incentives to avoid subsidiary defaults.
RATING SENSITIVITIES
IDRS, NATIONAL RATINGS AND SENIOR DEBT
Given the already high level of BMO's ratings, Fitch does not expect any
upside to ratings.
Similar to its peers, modest rating pressure could ensue should BMO's
credit performance deteriorate such as an increase in impaired loans
above the company's 10-year average. Fitch notes that this could
potentially become more severe should macroeconomic risks continue such
as pressure in the global oil and gas markets, a sharp increase in
unemployment, or increases in interest rates.
Fitch also highlights that BMO has sizable contribution from capital
markets to revenue, which is above its peer averages. Should capital
markets expand materially or should BMO look to move more from the
middle market to larger clients, this could potentially increase the
volatility of the company's earnings and a shift in strategy that could
lead to a higher risk profile. These factors would be viewed negatively
and may prompt a rating review.
SUPPORT RATING AND SUPPORT RATING FLOOR
SR of '2' incorporates Fitch's expectation that there could be some
level of support for Canadian Banks going forward although this has been
weakened given credible resolution framework. Although Canadian
authorities have taken steps to improve resolution powers and tools,
they maintain a flexible approach to bank resolution.
Fitch's assessment of continuing support for Canadian D-SIFI's has to
some extent relied upon resolution powers granted regulators under the
CDIC Act as well as the potential size, structure, and feasibility of
NVCC implementation.
Fitch's view on support could change should the CDIC Act diminish powers
of the CDIC to recapitalize a failing institutions leading to a
downgrade of the SR and SRF.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The subordinated debt and hybrid capital ratings are primarily sensitive
to any change in the VRs of the banks (or bank subsidiaries).
The preferred securities of BMO Capital Trust II are preferred
securities, which Fitch gives five notches from BMO's VR given
management and regulatory authorities' powers to suspend dividends.
SUBSIDIARY AND AFFILIATED COMPANIES
The subsidiary and affiliated company ratings including BMO Harris Bank
National Association are primarily sensitive to any change in the VRs of
the banks.
BMO Harris Bank National Association's VR is at 'bbb+' similar to other
U.S. banks of like size.
LONG- AND SHORT-TERM DEPOSIT RATINGS
The ratings of long- and short-term deposits issued by BMO Harris
National Association and its subsidiaries are primarily sensitive to any
change in BMO's IDR.
The ratings of long-term and short-term deposits issued by M&I Marshall
& Ilsley Bank and M&I Bank are primarily sensitive to any change in
BMO's IDR.
Fitch has affirmed the following ratings:
Bank of Montreal
--Long-term IDR at 'AA-'; Outlook Stable;
--VR at 'aa-';
--Short-term IDR at 'F1+';
--Senior unsecured debt at 'AA-';
--Subordinated debt at 'A+';
--Commercial paper at `F1+';
--Support Rating at '2';
--Support Floor at 'BBB-'.
BMO Harris Bank National Association (formerly Harris N.A.)
--Long-term IDR at 'AA-'; Outlook Stable;
--VR at 'bbb+';
--Long-term deposits at 'AA';
--Short-term IDR at 'F1+';
--Short-term deposits at 'F1+';
--Support Rating at '1'.
BMO Subordinated Notes Trust
--Subordinated debt at 'A+'.
BMO Capital Trust II
--Preferred stock rating at 'BBB'.
Marshall & Ilsley Corporation
--Senior debt at 'AA-'.
M&I Marshall & Ilsley Bank
--Subordinated debt at 'A+'.
Fitch has affirmed and withdrawn the following ratings:
M&I Marshall & Ilsley Bank
--Long term deposit at 'AA';
--Senior debt at 'AA-';
--Short-term deposits at 'F1+'.
M&I Bank FSB
--Long-term deposits at 'AA';
--Short-term deposits at 'F1+'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Global Bank Rating Criteria (pub. 20 Mar 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998358
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998358
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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