Sunday, December 19, 2010

BMO Running out of Steam! Makes Poor Acquisition in the U.S: Buy Another Bank.

Heading into the Christmas break, BMO Financial Group has announced that they are buying Wisconsin based bank Marshall & Ilsley Corp. for 4.1 Billion U.S. Dollars. The deal, expected to close in July 2011, will be financed by BMO stock, with more being issued prior to July.

This deal will double the size of BMO in the United States, to about 700 branches, but will not be accretive to earnings. What does this mean? It means that Marshall & Ilsley does not make any money right now! In fact, the bank has posted a loss of $483.5-million (U.S.) in the first nine months of 2010. That's after losing $858.8-million in 2009. As a shareholder of BMO, this deal concerns me. "Restructuring charges" alone are going to cost BMO over half a billion dollars, and that does not even include the prospect of their U.S. business suffering credit delinquencies from a bloated loan portfolio of American debt. The Canadian market is an excellent place for banking and finance companies to make a profit, but the U.S. mid-west is highly competitive and BMO will not get to enjoy the regulated oligopoly that they enjoy in Canada.

To be sure, BMO is making this buy because they are afraid of being left behind in the United States by TD and RBC. But RBC is suffering in its U.S. business and TD's is growing ever more complicated as it keeps making piecemeal transactions. Personally, I would much rather own a healthy "cash-cow" operating in a monopolistic Canadian marketplace than one fighting to simply make a profit in the U.S.

As a rule, it is important to remember that company's often make acquisitions, or buy other businesses, when they have discovered that the prospects for internal growth are becoming poor. Clearly BMO is beginning to discover that the prospects of organically expanding its U.S. operations are not bright, otherwise it would concentrate its 4.1 billion dollars on internal growth prospects, and not the purchase of an American liability.

Some other banks to begin taking a look at now may be CIBC, or Canadian Western. CIBC has a very profitable and healthy credit card division and a great dividend, but weak growth prospects. Canadian Western Canadian has posted 90 consecutive profitable quarters, the longest current streak among Canadian banks, but it is relatively high in price. I hope to do more research on Canadian Western in the future as it is a great up and coming bank with much potential for success.

For more information on CIBC and Canadian Western:

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