Fitch Affirms BMO's Ratings; Rates Senior Notes 'AA-'

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NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed all ratings of Bank of Montreal (BMO). Fitch has also assigned an 'AA-' to BMO's senior medium term notes. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.

The affirmation reflects BMO's good capitalization, diverse franchise, and sound financial fundamentals. BMO's ratings also benefit from Canada's strong economic and regulatory environment, as well as a stable domestic banking market.

The rating assigned to the senior medium-term notes is consistent with existing senior unsecured ratings of BMO. Proceeds from the senior medium-term notes issue will be used for general corporate purposes.

BMO completed its acquisition of U.S. regional banking company Marshall and Ilsley Corporation (MI) in the third quarter of 2011 (3Q'11). Although the MI merger poses significant challenges, Fitch expects management to be able to execute the integration without impact on the ratings.

BMO's reported net income advanced by 16% in fiscal (FY) 2011, to CAD 3.3 billion. Operating leverage was negative as non-interest expense growth of 13% slightly outpaced revenue growth of 12%. However, BMO benefited from an 18% drop in provisions for credit losses and retail loan growth. MI contributed profits of CAD 0.18 billion in 2H'11 after adjustments for integration costs and items related to the credit marks on MI's loan portfolio.

Looking at results by segment, full-year net income increased in each of BMO's three principal business lines. Personal & Commercial Banking net income grew by 11%, mostly due to strength in U.S. operations. Private Client Group net income grew by 13%, with some benefit from acquisitions. BMO Capital Market's bottom line also increased by 13%, due to higher investment banking fees and other non-interest income, and lower provisions for credit losses.

Liquidity remains comfortable with a large portion of total assets in cash and liquid securities. BMO benefits from a solid funding base, including a sizeable amount of retail deposits. In addition to its Canadian retail franchise, BMO's expanded U.S. based retail franchise diversifies the funding mix.

The ratio of gross impaired loans to loans continues to compare well internationally although it is at the high end amongst the major Canadian banks. Further, impaired loan levels have trended down over the past year. Overall, credit metrics have benefited from a supportive domestic retail lending environment where housing starts, home sales, and property prices have remained at relatively favorable levels. Total credit exposure to Portugal, Italy, Greece, Ireland and Spain is quite low. Exposure to other Eurozone countries and the rest of Europe is higher but Fitch believes it is manageable.

BMO's Tier 1 capital ratio under Basel II rules declined to 12.0% at YE 2011 from 13.5% at YE 2010 due in large part to the MI acquisition. The negative capital impact of the pending implementation of IFRS accounting standards on Basel II calculated capital ratios is manageable and will be phased in over five quarters. The pro forma Basel III Tier 1 Common Equity ratio was 6.9% at YE 2011, which already incorporates the full impact of IFRS implementation. BMO's earnings generation capacity should help it meet the Basel III minimum Tier 1 common equity ratio of 7% before the initial implementation date in early 2013.

BMO is the fourth largest Canadian bank with a coast-to-coast branch footprint. In addition to Canadian retail and commercial banking, its operations include trading, capital markets and investment banking operations, asset management and insurance. BMO's U.S. retail operations combine legacy operations of Harris and MI. The combined footprint spans the upper Midwest of the U.S. and also includes a presence in Arizona and Florida.

Fitch has affirmed the following ratings:

Bank of Montreal

--Long-term Issuer Default Rating (IDR) at 'AA-', Outlook Stable;

--Viability Rating at 'aa-';

--Short-term IDR at 'F1+';

--Senior unsecured debt at 'AA-';

--Subordinated debt at 'A+';

--Commercial paper at `F1+';

--Individual at 'B';

--Support at '1';

--Support Floor at 'A-'.

BMO Harris Bank National Association (formerly Harris N.A.)

--Long-term IDR at 'AA-', Outlook Stable:

--Viability Rating at 'bbb+'

--Long-term deposits at 'AA';

--Short-term IDR at 'F1+';

--Short-term deposits at 'F1+';

--Individual at 'B/C';

--Support at '1';

BMO Subordinated Notes Trust

--Subordinated debt at 'A+'.

BMO Capital Trust D

BMO Capital Trust E

BMO Capital Trust II

--Preferred stock rating of 'A', Rating Watch Negative maintained.

Marshall & Ilsley Corporation

--Senior Debt affirmed at 'AA-' ;

M&I Marshall & Ilsley Bank

--Long-term deposits at 'AA';

--Senior Debt at 'AA-'';

--Subordinated Debt at 'A+'';

--Short-term deposits at 'F1+''.

M&I Bank FSB

--Long-term deposits at 'AA' ;

--Short-term deposits at 'F1+'.

Additional information is available at www.fitchratings.com . The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Aug. 16, 2011);

--'Bank Holding Companies' (Aug. 16, 2011);

--'Rating Bank Regulatory Capital and Similar Securities' (Dec. 15, 2011).

Applicable Criteria and Related Research:

Rating Bank Regulatory Capital and Similar Securities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656371

Bank Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648612

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=649171

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