Is The BOTW Sale A Lending Signal?
Sometimes, what a company does says more about it than what they say. As you may or may not know, Bank of the West, a large California & Midwest bank has recently agreed to be sold by BNP to BMO. BNP, or Banque National de Paris has sold the 147-year-old subsidiary. The new Canadian owner (Bank of Montreal) will merge Bank of the West (BOTW) into its BMO Harris unit.
Good fit culturally and financially
BOTW has about 1.8 million customers and about $105 billion in assets. BMO Harris has about $166 Billion in assets. It appears to be a good fit culturally and financially. BMO was able to secure the deal, as they could offer all cash. BNP will use $4 billion of the proceeds to buy back stock, which will mitigate the loss of earnings from BOTW. BMO has a long record of successful acquisitions, so we are not worried about the ability to generate cost savings and make the deal accretive relatively soon.
The only near-term hiccup may be the ability of the Biden Administration to approve the deal’s closing. They have commented about looking closer at approving mergers. The departure of Randal Quarles (the Fed’s Vice Chair for Supervision) at the end of his 4 year term and entrance of Sarah Bloom Raskin into the role just a month ago also raises questions.
Is BMO going to close branches and reduce staff?
Getting more granular, let’s look at the deal itself. BMO is looking for some major cost reductions to make the deal accretive, all while saying very publicly they are not going to close branches and reduce staff. This may be because BOTW gets 70% of its deposits from California. That suggests that BMO will have staff reductions possibly.
Both BMO and BOTW are also laggards in mobile banking, based on a recent survey. Development and roll out of new strategies was emphasized by BNP in the FinLab unit, but it appears to have been closed. Both banks are going to need to add to their technology budgets, especially now that BOTW is competing head-to-head with banks like Wells Fargo and BofA.
Foreign banks selling their units
This transaction also followed other foreign banks selling their units. Union Bank was sold by MUFG to Minneapolis-based U.S. Bank In September. Spain’s BBVA sold their US retail banking arm to PNC (who BOTW earlier had thoughts to be a good merger partner). In May, HSBC sold 80 branches to Citizen’s Bank in Rhode Island and 10 to Los Angeles-based Cathay Bank. As expected, many of these parties struct deals to continue to service commercial relationships.
BMO paid all cash, which means its capital base is now smaller. That implies that they will not be able to use derivatives to the same extent until the base is rebuilt. BMO is expected to emphasize retail and small/medium-sized business banking, which is good for BOTW’s SoCal customers.
BNP recently bought the Prime Broker books from Deutsche Bank and Credit Suisse, so the new cash will help them expand that unit. It also makes the European Central Bank smile, and they want European banks to focus locally.
The deal was a good trade for both companies. It doesn’t appear to be disruptive to BOTW’s Los Angeles customers. In fact, we may be working even more closely, as they are even more focused on the SoCal business loan market.
Expect more of these transactions, at least until lending margins begin to improve. Lending capacity in areas that BOTW specializes in such as the RV industry, Marine, Agribusiness & Practice Acquisition (for buying medical practices) should continue to be a healthy sign for SoCal. Our clients often ask for us to show them Industry-specialized working capital loan markets. We’re very happy to see BMO’s interest in California general commercial lending and narrow-need business lending. Our value comes from knowing what industry specialists have for available lending capacity.
Please join us in calling our friends there, on “a major merger that was well done.”