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   DOW JONES NEWSWIRES

Bank of Montreal (BMO) is expected to get a bigger boost to its image than its earnings with its purchase of American International Group Inc.'s (AIG) Canadian life-insurance business for about C$375 million (US$309 million).

Analysts said the move will diversify BMO's revenue, broaden its wealth-management operations, and put it in a good position if Canada's federal government relaxes rules prohibiting insurance sales in bank branches.

But they also noted the addition of AIG's C$2.4 billion in assets would have little impact on earnings.

"The acquisition looks immaterial to near-term earnings, but it is positive for optics," Desjardins Securities said in a note, while John Aiken at Dundee Securities said "this is not a transformational acquisition."

In Toronto Tuesday, BMO is up 54 Canadian cents to C$33.35 on 620,000 shares. Other bank shares are generally trading lower Tuesday.

Canada's fourth-largest bank said AIG's Canadian operations, which have 300 employees and 400,000 customers, will be integrated with the bank's existing insurance operations over the next six to 12 months. The combined operation will be known as BMO Life Insurance Co. and will operate under the BMO Insurance brand.

"This acquisition is a perfect extension of our existing wealth-management offering and our goal to become the one-stop location for all our clients' financial and investment needs," BMO Chief Executive Bill Downe said in a statement.

AIG is trying to sell or contain huge risks it amassed in its financial-products unit, where multi-billion-dollar problems led to a government rescue in September.

BMO Capital Markets acted as financial adviser to Bank of Montreal, while J.P. Morgan Securities acted as AIG's financial adviser.

While BMO noted the acquisition would be accretive to earnings within one year, analysts said its contribution would be minimal. Michael Goldberg at Desjardins said AIG's Canadian life operations earned C$18 million in 2005, C$40 million in 2006, C$48 million in 2007 and had an operating loss of C$15 million in the first three quarters of this year. Even if annual earnings recover to C$40 million, Goldberg said the impact on BMO's per-share earnings would be "immaterial."

More importantly, however, analysts said the acquisition wouldn't hurt BMO's all-important Tier 1 Capital ratio. The bank noted the buy would reduce Tier 1 by 15 basis points, and observers said that would still leave the Tier 1 ratio above the key 10% level. However, the purchase will cause another 10-basis-point reduction in 2011, when new Basel II rules come into effect under which investments in insurance subsidiaries must be consolidated, Goldberg noted.

Aiken at Dundee Securities said BMO got its hands on the unit at a "steal" of a price, estimating the purchase was done at 1.1 times book value. Most large Canadian insurers are now trading at about 1.3 times book value, he noted.

The purchase price is subject to any change in book value at the time of closing, expected by June 1.

The purchase still leaves BMO far behind Royal Bank of Canada (RY) in terms of premiums and deposits, Aiken noted. RBC has the largest insurance operations of all Canadian banks.

Dundee has an investment-banking relationship with BMO but the analyst doesn't own the bank's shares. It wasn't immediately clear whether Desjardins has an investment-banking relationship with BMO nor whether the analyst owns its shares.

-Judy McKinnon and Monica Gutschi; 416-306-2100; AskNewswires@dowjones.com

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