CHICAGO–(BUSINESS WIRE)–Fitch Ratings has upgraded the ratings of Marshall & Ilsley Corporation (MI) and its affiliates following the completion of their acquisition by Bank of Montreal (BMO). Since the MI entities have been merged into BMO entities, their IDRs and Individual ratings are removed from Rating Watch Positive, aligned with those of BMO, and subsequently withdrawn. Debt and deposit ratings of MI entities are also removed from Rating Watch Positive and aligned with BMO ratings.
At the same time Fitch has affirmed all ratings of BMO and its existing affiliates. The Rating Outlook is Stable for all entities. Fitch also notes that BMO has renamed certain of its U.S. subsidiaries. A complete list of ratings and name changes follows at the end of this release.
The affirmation reflects BMO’s good capitalization, diverse franchise, and sound financial fundamentals. Although the MI merger poses significant challenges, Fitch expects management to be able to execute the integration without impact on the ratings. The merger accounting includes a charge to recognize all expected future losses on the MI portfolio. As a result, BMO’s main credit exposure on MI’s troubled commercial real estate (CRE) holdings in Arizona and Florida is to further deterioration in those markets.
Earnings performance in the first half of 2011 (1H’11) grew about 12% over prior year levels, as BMO has benefited from declining provisions for credit Losses. While BMO’s ratio of gross impaired loans to loans remains above those of Canadian peers, it continues to compare well internationally. Credit metrics have benefited from a supportive domestic retail lending environment where housing starts, home sales, and property prices have remained at relatively favorable levels. However, the increase in household leverage in Canada warrants close monitoring.
BMO’s Tier I ratio improved to 13.82%, at April 30, 2011 up from 13.45% at fiscal year (FY) 2010, and is near the median for large Canadian banks. Management calculated its pro forma Basel III Common Equity ratio including the impact of the MI acquisition at 6.9% at April 30, 2011. Management has announced that it does not intend to issue additional common equity in connection with the MI acquisition. Final Basel III capital standards, including additional buffers that may be required of systemically important financial institutions, have not yet been determined. Still, Fitch believes BMO’s good capital generation ability and access to funding markets should enable it to build and retain sufficient capital to meet regulatory guidelines and to absorb the risk in its business profile.
Liquidity remains comfortable with a large portion of total assets in cash and liquid securities. BMO benefits from a solid funding base, including a sizeable amount of retail deposits. In addition to its Canadian retail franchise, BMO’s expanded U.S. based retail franchise diversifies the funding mix.
The Rating Outlook is Stable. Difficulties in integrating MI or an unexpected increase in problem asset levels could result in downward rating pressure. Upward ratings movement potential is limited due to BMO’s already strong ratings profile.
The IDRs and debt ratings of BMO Bankcorp, Inc. (formerly Harris Bankcorp, Inc.) and BMO Harris Bank National Association (formerly Harris National Association) are linked to those of BMO, since Fitch believes the parent is both able and willing to provide financial support in a crisis scenario. The Individual rating of ‘B/C’ assigned to BMO Bankcorp, Inc. and BMO Harris Bank National Association remains one notch lower than that of parent BMO. This rating reflects somewhat elevated problem asset levels, lackluster historical earnings and the risk in integrating the MI deal.
The MI entities rated by Fitch have now ceased to exist. MI has merged into BMO Financial Corporation, while M&I Marshall & Ilsley Bank and M&I Bank FSB have merged into BMO Harris Bank National Association. Debt and deposit ratings of the MI entities have been removed from Rating Watch and upgraded to parity with comparable ratings of BMO and its subsidiaries. IDRs, Individual and Support ratings of all MI entities have been removed from Rating Watch, upgraded and withdrawn. Fitch has also withdrawn its ratings on MI preferred stock issued under the Troubled Asset Relief Program, which was repaid as part of the transaction, and on MI commercial paper programs, which are being discontinued.
BMO is the fourth largest Canadian bank with a coast-to-coast branch footprint. In addition to Canadian retail and commercial banking, its operations include trading, capital markets and investment banking operations, asset management and insurance. BMO’s U.S. retail operations, now housed under BMO Bankcorp, Inc., combine legacy operations of Harris and MI. The combined footprint spans the upper Midwest of the U.S. and also includes a substantial presence in Arizona and Florida.
Fitch has taken the following rating actions:
Bank of Montreal
–Long-term Issuer Default Rating (IDR) affirmed at ‘AA-‘;
–Short-term issuer rating affirmed at F1+’;
–Senior unsecured debt affirmed at ‘AA-‘;
–Subordinated debt affirmed at ‘A+’;
–Commercial paper affirmed at `F1+’
–Individual affirmed at ‘B’;
–Support affirmed at ‘1’;
–Support Floor affirmed at ‘A-‘;
Rating Outlook Stable.
BMO Bankcorp, Inc. (formerly Harris Bankcorp, Inc.)
–Long-term Issuer Default Rating (IDR) affirmed at ‘AA-‘;
–Short-term Issuer rating affirmed at ‘F1+’;
–Individual affirmed at ‘B/C’;
–Support affirmed at ‘1’;
Rating Outlook Stable.
BMO Harris Bank National Association (formerly Harris N.A.)
–Long-term IDR affirmed at ‘AA-‘;
–Long-term deposits affirmed at ‘AA’;
–Short-term issuer rating affirmed at ‘F1+’;
–Short-term deposits affirmed at ‘F1+’;
–Individual affirmed at ‘B/C’;
–Support affirmed at ‘1’;
Rating Outlook Stable.
BMO Subordinated Notes Trust
–Subordinated debt affirmed at ‘A+’.
BMO Capital Trust C
BMO Capital Trust D
BMO Capital Trust E
BMO Capital Trust II
–Preferred stock affirmed at ‘A’.
Marshall & Ilsley Corporation
–Long-term IDR removed from Rating Watch Positive, upgraded to ‘AA-‘ from ‘BBB+’ and withdrawn;
–Short-term IDR removed from Rating Watch Positive, upgraded to ‘F1+’ from ‘F2’ and withdrawn;
–Individual removed from Rating Watch Positive, upgraded to `B/C’ from ‘C’ and withdrawn;
–Support removed from Rating Watch Positive, upgraded to `1′ from ‘5’ and withdrawn;
–Support Floor withdrawn;
–Senior Debt removed from Rating Watch Positive and upgraded to ‘AA-‘ from ”BBB+’;
–Preferred Stock ‘BBB-‘ withdrawn;
–Commercial Paper removed from Rating Watch Positive, upgraded to ‘F1+’ from ‘F2’ and withdrawn.
M&I Marshall & Ilsley Bank
–Long-term IDR removed from Rating Watch Positive, upgraded to ‘AA-‘ from ‘BBB+’ and withdrawn;
–Short-term IDR removed from Rating Watch Positive, upgraded to ‘F1+’ from ‘F2’ and withdrawn;
–Individual removed from Rating Watch Positive, upgraded to `B/C’ from ‘C’ and withdrawn;
–Support removed from Rating Watch Positive, upgraded to `1′ from ‘5’ and withdrawn;
–Support Floor withdrawn;
–Long-term deposits removed from Rating Watch Positive and upgraded to ‘AA’ from `A-‘;
–Senior Debt removed from Rating Watch Positive and upgraded to ‘AA-‘ from ‘BBB+’;
–Subordinated Debt removed from Rating Watch Positive and upgraded to ‘A+’ from ‘BBB’;
–Short-term deposits removed from Rating Watch Positive and upgraded to ‘F1+’ from ‘F1’.
M&I Bank FSB
–Long-term IDR removed from Rating Watch Positive, upgraded to ‘AA-‘ from ‘BBB+’ and withdrawn;
–Short-term IDR removed from Rating Watch Positive, upgraded to ‘F1+’ from ‘F2’ and withdrawn;
–Individual removed from Rating Watch Positive, upgraded to `B/C’ from ‘C’ and withdrawn;
–Support removed from Rating Watch Positive, upgraded to `1′ from ‘5’ and withdrawn;
–Support Floor withdrawn;
–Long-term deposits removed from Rating Watch Positive and upgraded to ‘AA’ from `A-‘;
–Short-term deposits removed from Rating Watch Positive and upgraded to ‘F1+’ from ‘F1’;
–Commercial Paper removed from Rating Watch Positive, upgraded to ‘F1+’ from ‘F2’ and withdrawn.
Additional information is available at www.fitchratings.com
