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BMO unveils major U.S. expansion with $17-billion purchase of California-based Bank of the West – The Globe and Mail



BMO is paying $17.1-billion for Bank of the West, making it the largest-ever purchase of a U.S. bank by a Canadian one.Chris Wattie/Reuters

Bank of Montreal is making a major splash in the United States with a cash deal to buy Bank of the West for a total purchase price of $20.9-billion, an acquisition that will boost BMO’s American assets by 63 per cent and shift its U.S. geographic base away from the Midwest and toward California.

San Francisco-based Bank of the West is currently owned by French giant BNP Paribas, which is exiting the U.S. retail and commercial banking market with the sale. After adjusting for excess capital on Bank of the West’s balance sheet, which is akin to cash that is sitting around, BMO is paying $17.1-billion, making it the largest-ever purchase of a U.S. bank by a Canadian one.

The acquisition price amounts to 1.5 times Bank of the West’s book value, after accounting for the excess capital. A rule of thumb for bank mergers is that anything over two times book value is seen as paying a rich purchase price. According to regulatory filings, Bank of the West generates a return on equity of 7 per cent, while BMO’s equivalent return in the U.S. is 10 per cent.

The purchase price amounts to roughly 20 per cent of BMO’s current stock market value, and will be largely funded with excess capital BMO has sitting around because Canadian regulators prevented banks from boosting dividends or repurchasing shares for much of the COVID-19 pandemic. These restrictions were recently lifted, and BMO has decided to deploy the capital toward future growth.

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The U.S. is currently experiencing a wave of regional bank consolidation as mid-sized lenders bulk up to better compete against the country’s four largest megabanks, which benefit from scale efficiencies and massive technology expense budgets. Recent deals include BB&T Corp.’s US$28-billion all-stock acquisition of SunTrust Banks Inc. in 2019, creating a U.S. southeast powerhouse, and PNC Financial Services Group Inc.’s US$11.6-billion acquisition of BBVA USA Bancshares Inc., the U.S. arm of Spain’s BBVA, completed in 2021.

BMO’s deal is in line with this trend, however, it follows a major jump in U.S. bank valuations, with the KBW Nasdaq Bank Index of stocks in the sector up 32 per cent year-to-date before the purchase was announced.

BMO is also expanding into a region where there is little overlap with its existing operations. Although BMO is doubling the size of its branch network in the U.S. – both banks have roughly 500 branches each – BMO’s branches are predominately located in Illinois and Wisconsin, whereas 70 per cent of Bank of the West’s US$89-billion in deposits are located in California. The bank also has branches in states such as Colorado and Minnesota.

By contrast, BMO’s purchase of Marshall & Ilsley Corp. for US$4.1-billion, completed in 2011, added scale to its existing Midwest footprint, and the purchase was announced in the early days of the economic recovery from the 2008-09 global financial crisis. The timing allowed BMO to purchase M&I cheaply because M&I had a troubled loan book stemming from real estate loans in Florida and Arizona before the crisis.

Yet the new deal will give BMO a solid exposure to the fast-growing West and South in the U.S. Relative to other states, California had one of the lighter hits to gross domestic product in 2020, according to the Bureau of Economic Analysis, and it has been one of the fastest-growing states this year. Illinois, meanwhile, has seen softer growth for much of the past decade.

BMO is also buying a bank with a higher efficiency ratio, a key metric in financial services that measures expenses as a percentage of revenues. Bank of the West’s efficiency ratio is 62 per cent, while BMO’s is 55 per cent in the U.S. If BMO can lower the ratio at Bank of the West, it should boost future earnings.

“We’ve had an interest in this particular bank for a very long time,” BMO chief executive Darryl White said in an interview, adding that often in mergers and acquisitions, “you can’t control your timing.”

While BMO had to wait for a deal, Mr. White said the bank being acquired is, “frankly, better than any opportunity we’ve seen. And we’ve seen a lot of them.”

BMO has also benefited itself from the rise in bank valuations. Before the deal was announced its own shares had climbed 38 per cent since January. BMO’s shares fell 1.9 per cent on the Toronto Stock Exchange Monday.

Bank of the West focuses mostly on consumer and commercial banking, and during an investor call, BMO executives emphasized the commercial opportunities. BMO’s roots are in commercial lending and the bank has been expanding its U.S. commercial business over the past few years by opening offices in metro areas such as Dallas-Fort Worth. Commercial loans comprise 60 per cent of Bank of the West’s loan portfolio, and the new deal will bolster BMO’s business in a way that would take years to build on its own.

“We’ve been in California for over 100 years in the commercial space, but not with the scale they have,” David Casper, U.S. head of BMO Financial Group, said on the call.

As for the retail banking opportunities, BMO said a key goal is to cross-sell acquired clients with existing BMO products, including wealth management offerings.

BMO is also emphasizing cost savings that will come from the acquisition – particularly for technology expenses, because the two banks use a lot of the same vendors.

However, BMO has pledged not to close any acquired branches, which may limit its cost savings. In many bank mergers, branch closings are an important source of cuts.

“No doubt California is an economic juggernaut bigger than all of Canada combined, and Bank of the West has deep roots there. … However, the addition of 514 additional branches (which BMO has pledged not to close despite $860-million in expense synergies) seems like a material change in the bank’s ‘branch-light’ approach,” Bank of Nova Scotia analyst Meny Grauman wrote in a note to clients.

To fund the acquisition, BMO plans to use $9.7-billion of its existing capital, which comes from money sitting on its balance sheet, as well as funds from the sale of its asset management business in Europe, the Middle East and Africa. BMO also expects to generate $3.8-billion in capital over the next year that it will put toward the purchase price – but that money isn’t guaranteed, because economic conditions could affect its profit. Another $2.7-billion will come from selling new shares.

U.S. regulators have recently suggested they are concerned about bank concentration given the recent spate of deals, but Mr. White said BMO is not concerned about getting the necessary approvals. “We think the transaction meets all the requirements for regulatory approval, not just because that would be convenient,” he said on the investor call. To back this up, he cited the minimal concentration of deposits between the two banks, because there isn’t much geographic overlap, and the fact that neither has any financial stability concerns.

BMO first expanded to the U.S. in 1984 by acquiring Chicago-based Harris Bank for $718-million, and doubled down in 2011 by acquiring M&I. Rival Canadian banks have also spent heavily in the U.S. over the past 15 years, with Toronto-Dominion Bank buying Commerce Bancorp Inc. in 2008, Royal Bank of Canada acquiring City National Bank in 2015 and Canadian Imperial Bank of Commerce buying PrivateBancorp Inc. in 2017.

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Markets split on BoC decision as business survey, inflation loom – BNN



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The Bank of Canada is getting a pair of key indicators this week ahead of a rate decision next Wednesday that’s virtually a coin toss, as far as markets are concerned.

First up on Monday, the central bank releases its quarterly Business Outlook Survey, which provides a snapshot of how approximately 100 corporate leaders are feeling about the economy and their own business fundamentals.

When the last survey was released in October, it showed the broadest gauge of sentiment was at the highest level in the survey’s history. That was despite worsening labour shortages and as more than half of respondents (57 per cent) said they expected labour costs to accelerate over the next year.

“[Monday’s] Business Outlook Survey might have been completed too early to catch Omicron uncertainties, so expect respondents to retain a healthy dose of optimism,” said CIBC World Markets Chief Economist Avery Shenfeld in a report to clients Friday.

“The survey could show a majority expecting inflation to run above the top end of the Bank of Canada’s one-three per cent inflation band. If not for Omicron, that would spell a rate hike in January, but the uncertainties surrounding how long this disruption will last should be enough to defer that decision.”

Meanwhile, Statistics Canada will release the consumer price index for December on Wednesday. Economists are expecting to see inflation rose 4.8 per cent year-over-year in the month; that would be the fastest rate of growth since 1991.

As of 8:30 a.m. Monday morning, market data shows investors see a 59 per cent chance of a rate hike when the Bank of Canada delivers its decision on Jan. 26.

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House Price Index rose 26% in 2021, fastest pace on record – CBC News



The Canadian Real Estate Association’s House Price Index rose by 26.6 per cent in the 12 months up to December, the fastest annual pace of gain on record.

The group, which represents more than 100,000 realtors and tabulates sales data from homes that listed and sell via the Multiple Listings Service, said the supply of homes for sale at the end of the month hit an all-time low.

After pausing for a few weeks in the early days of the pandemic, Canada’s housing market has been on an absolute tear for the past two years, as feverish demand from buyers wishing to take advantage of rock-bottom interest rates has drastically outpaced the supply of homes to buy.

That imbalance is a major factor contributing to higher prices, as buyers have to pay more and more to outbid others because of the lack of alternatives.

Various experts are suggesting that parts of the country are showing signs of being in a speculative bubble, and CREA says the biggest reason for runaway price increases is that there aren’t enough homes being put up for sale.

“There are currently fewer properties listed for sale in Canada than at any point on record,” CREA’s chief economist Shaun Cathcart said. “So unfortunately, the housing affordability problem facing the country is likely to get worse before it gets better.”

High prices not denting demand

CREA says the average price of a Canadian home that sold on MLS in December went for $713,500. That’s actually down from the record high of more than $720,000 in November, but still well up on an annual basis.

High prices don’t seem to be slowing demand, however, as 2021 was the busiest year for home sales ever. Some 666,995 residential properties traded hands on MLS last year, smashing the previous annual record by 20 per cent.

TD Bank economist Rishi Sondhi said that there was a less than two-month supply of homes for sale during the month, which means at the current sales pace, all listings would be gone in less than two months. Under normal conditions, there’s a five-month supply of homes for sale, and Sondhi says that supply and demand imbalance is a major factor in eye-popping price gains.

“With interest-rate pull-forward behaviour keeping demand so strong, and supply struggling to keep up, it’s little wonder why prices are continuing their relentless upward march,” he said. “Buyers pulling forward demand ahead of looming interest rate hikes kept sales at unsustainable levels last month. How long this effect will last is uncertain, but it should eventually fade.”

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COVID-19 antiviral: Canada authorizes Pfizer pill – CTV News



Health Canada has authorized the use of Pfizer’s COVID-19 antiviral treatment Paxlovid.

The federal health agency says the prescription-only medication can be given to adults ages 18 and older to treat mild to moderate cases of COVID-19, if they have a confirmed positive viral test and are at a high risk of becoming seriously ill. 

The authorization comes with specific instructions on scenarios in which the regime cannot be used, including to prevent COVID-19 infections or to treat patients who are already hospitalized due to severe COVID-19 cases.

The medication— two antiviral medicines co-packaged together— cannot be taken for longer than five days in a row, nor can it be given to teens or children.

More details about the authorization are being provided by Health Canada’s Chief Medical Adviser Dr. Supriya Sharma, in a technical briefing in Ottawa.

Pfizer submitted clinical data for the oral medication, on Dec. 1, 2021. 

The government has a deal in place with the pharmaceutical giant securing access to an initial one million doses of the therapeutic drug.

Responding to recent calls from the provinces for a swift rollout of this medication in the face of an expected surge in Omicron hospitalizations, the federal government has vowed that delivery of the drug will happen in short order.

Health Minister Jean-Yves Duclos and Procurement Minister Filomena Tassi will be holding a press conference to discuss the rollout of this treatment at 1:30 p.m. EST.

In November 2021, Pfizer released the results of their Phase 2/3 trials for the drug, stating that they had found the pills to significantly reduce hospitalization and death in COVID-19 patients. 

Pfizer said that in a randomized, double-blind study of more than 380 patients, there was an 89 per cent reduction in the risk of being hospitalized or dying of COVID-19 in patients that received Pfizer’s pill within three days of displaying COVID-19 symptoms, compared to the study group that received a placebo.

According to Pfizer, Paxlovid is designed to block the activity of an enzyme in SARS-CoV-2 that is essential for the virus to replicate itself, and also help to slow the breakdown of the pill’s ingredients in order to help combat the virus for longer.

“PAXLOVID stops the virus from multiplying. This can help your body to overcome the virus infection and may help you get better faster,” reads Health Canada’s authorization.

Paxlovid contains two medicines co-packaged together, a 150mg pink tablet of Nirmatrelvir and a 100mg white tablet of Ritonavir, which has been used in combination with other antiviral medications before.

The regime is meant to be taken consistently twice a day, for five days in a row. The agency has outlined on their website the detailed instructions for taking this medication, as well as a list of potential contraindications.

For example, Health Canada has issued warnings for patients with kidney or liver problems; patients with a human immunodeficiency virus (HIV) infection; patients who are pregnant, breastfeeding, or are planning to become pregnant; and patients who take a series of other medicines which may interact with Paxlovid.

Side effects can include an altered sense of taste, diarrhea, muscle pain, vomiting, high blood pressure, and headache. Though, given the limited use of this medication to date, the agency cautions that it is possible not all side effects are known at this time and advise speaking with a healthcare professional if other side “troublesome” effects arise.

The medication is what is called a “protease inhibitor antiviral therapy”, a type of medication that has largely been used before to treat HIV/AIDS and hepatitis C.  

Health Canada has also been reviewing an experimental pill from drugmaker Merck, called molnupiravir, since mid August. The federal government also has a contract to purchase 500,000 of Merck’s antiviral medication, with an option for 500,000 more pending regulatory approval.

In late December, the U.S. Food and Drug Administration issued an emergency use authorization for both Pfizer and Merck’s drugs.

With files from CTV News’ Alexandra Mae Jones and Sarah Turnbull 

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