BMO and Bank of the West: Key Financial Implications
Event
Last month, BNP Paribus indicated that it had hired advisors to explore the sale of
the Bank of the West (BW). Recent media speculation has BMO as th leading suitor
in a process that has the potential to attract other interested parties.
Impact: POTENTIALLY POSITIVE (particularly over the long term)
Our key assumption to assess a potential deal include: a) 1.3x tangible BV (1.0x BV;
18x forward-earnings; 16% of deposits); b) target CET1 post-deal of 11.5%; c) cost
synergies of 20%; d) revenue attribution of 3%; and e) PCLs ratio of 40bps (down
from 56bps in 2020). On this basis, the purchase price is $17.3bln (US$13.6bln),
financed with excess capital of $9.7bln (56% of purchase price) and equity of $7.6bln.
The resulting accretion to 2022E EPS (full synergies and attrition) is a solid 7%. If
we assume a purchase price of US$15bln (consistent with media speculation), the
transaction values BW at 1.44x tangible BV (1.1x BV; almost 21x forward earnings
and 18% of deposits). On this basis, the deal is financed with $9.8bln of excess
capital (51%) and equity of $9.4bln. On these metrics, accretion falls to 5%.
While a deal of this size and nature would be viewed as strategically important
(Canada can only do so much for our large banks) and the accretion is attractive, the
size of the equity component would be difficult to absorb by the Canadian market.
We do not envision BNP taking $8bln-plus in BMO stock. Accordingly, we believe the
deal would weigh on BMO's stock as investors sell stock now to make room for the
large raise at a discount to current levels. Ultimately, however, we believe Canada's
banks have “outgrown Canada”, making deals of this nature very important to the
long-term growth and profitability aspirations of these institutions. For this reason,
we would likely view a deal on the terms we outline as attractive.
TD Investment Conclusion
Our positive outlook is supported by industry-leading PTPP growth, reflecting
an advantaged business mix and expense control. We are also influenced by
management's optimistic 2022 outlook. Although we believe BMO's PTPP growth
will not exceed the group average in 2022, we believe relative valuation does not
reflect BMO's very strong performance during the pandemic.
Recommendation: BUY
Risk: LOW
12-Month Target Price: C$160.00
12-Month Dividend (Est.): C$5.48
12-Month Total Return: 21.1%