2nd UPDATE:BMO To Buy AIG's Canadian Life Insur Operations For C$375 Million
January 13 2009 - 1:12PM
Dow Jones News
(Updates stock-price activity, adds comments from BMO executive in paragraphs 7, 8, 11 and 12.)
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 57 Canadian cents to C$33.38 on
1.2 million shares. After opening lower, other bank shares are
generally trading higher at midday.
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. BMO now has 800 insurance advisors at 74 BMO Nesbitt
Burns branches across Canada.
"This adds to our product suite, and complements what do," said
Gilles Oullette, chief executive of BMO's Private Client Group. He
said the addition of AIG's operations will create a direct
distribution channel for BMO's insurance products, boding well for
long-term growth prospects. BMO could invest in further staff to
bolster organic growth in the business, he said in an
interview.
"If anything happens in terms of changing regulations (that
allow banks to sell insurance in branches), that would just be a
bonus," Oullette said.
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.
Ouellette said BMO had been searching for additional
opportunities to add to its wealth-management operations, and opted
for AIG's domestic business because of its size, product offerings,
and distribution capabilities.
"We put a lot of effort into this, because it is very, very
complementary," he said.
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
Click here to go to Dow Jones NewsPlus, a web front
page of today's most important business and market news, analysis
and commentary. You can use this link on the day this article is
published and the following day.