Bank of Montreal Drops on $2.3 Billion Stock Sale to Hit Capital Hurdle

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(Bloomberg) — Bank of Montreal, which is working to close the largest acquisition in its history, is selling C$3.15 billion ($2.31 billion) in equity to make sure it can meet Canadian regulators’ recently-increased capital requirements.

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The bank is issuing C$1.4 billion in shares in a public offering at C$118.60 each, and another 14.8 million shares at the same price to a group of six Canadian pension plans and BNP Paribas, according to a statement Monday. 

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Bank of Montreal fell to C$119 as of 4:58 p.m. in Toronto, down 5.7% from Friday’s close. The equity deal will dilute the bank’s earnings per share by about 4%, Bloomberg Intelligence analysts Paul Gulberg and Ethan Kaye said in a note. 

Bank of Montreal’s capital levels have been under closer scrutiny since Canada’s Office of the Superintendent of Financial Institutions last week raised the required common equity tier one ratio for the country’s largest banks by 50 basis points, to 11%, as of Feb. 1. 

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With the bank’s $16.3 billion acquisition of Bank of the West from BNP set to close in the first quarter of next year, the lender was at risk of failing to meet that hurdle, prompting it to sell stock to give it some breathing room. 

Bank of Montreal said Monday that it will target a CET1 ratio at or above 11.5% in light of the regulator’s announcement last week.

The unexpected change by OSFI has weighed on Bank of Montreal’s shares, sending them down 2.2% on Thursday. The lender’s stock had been down 7.4% this year through last week, compared with a 9.6% drop for the S&P/TSX Commercial Banks Index.

Bank of Montreal has granted its underwriters an option to buy as many 1.77 million additional shares at the same price up to 30 days after the public offering closes. 

The lender struck the Bank of the West deal almost a year ago. The transaction would give it 1.8 million new customers, $105 billion in assets and an active presence in 32 U.S. states including California.

(Adds note from Bloomberg Intelligence analysts in third paragraph.)

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