Thursday, October 18, 2007

BMO May Have Repurchased $13 Billion of Its Own ABCP

Financial Post, Duncan Mavin, 18 October 2007

Bank of Montreal may have raised as much as $22-billion in August to fund a massive buyback of its own asset-backed commercial paper, said CIBC World Markets analyst Darko Mihelic.

The bank may have repurchased $13-billion of its own ABCP with the funds in August and now has a significant amount of liquid assets available if further purchases in the troubled ABCP market are necessary, he said.

"It likely proved to be a wise 'bet' as liquidity further dried in September system-wide. We wonder what other banks may have to do in what we believe was a tighter market in September [for ABCP]," Mr. Mihelic said in a research note.

Asset-backed commercial paper is a type of security backed by a package of debt obligations, such as credit card debt or other loans.

A portion of Canada's ABCP market, known as non-banksponsored ABCP, worth $40-billion was hit by fallout from the U.S. subprime-mortgage crisis in August, leaving investors holding billions worth of commercial paper they could not redeem. While a team of investors, bankers and lawyers is working to thaw the non-bank ABCP market, there have been fears the problems could spill over into the banksponsored paper.

Mr. Mihelic said his analysis may show BMO raised funds by borrowing from other banks and by attracting commercial deposits, possibly in anticipation of problems in the ABCP market.

"BMO may have been ahead of the curve and prudent with respect to funding," he said.

Meanwhile, the CIBC analyst said the huge increase in assets is not likely to add significantly to fourth-quarter earnings at BMO, which has had a difficult year.

The bank's domestic retail franchise, which lags competitors, is struggling to make any headway despite some recent initiatives, while its U.S. Harrisbank network has produced "sub par results" despite a string of recent acquisitions, noted Mr. Mihelic.

New chief executive Bill Downe has also had to deal with 1,000 job layoffs as part of a $135-million restructuring, as well as a natural-gas trading scandal that has so far cost the bank $424-million in after-tax losses.

Most recently, BMO has been dragged into the ABCP quagmire and has also been exposed as a significant player in the U.S. sector of the global credit crunch focused on structured investment vehicles or SIVs. The bank said this week it is not part of a group of top U.S. banks that has organized a US$80-billion fund to deal with the problems around SIVs, but said it is "following closely" developments regarding the proposed fund.

Facing a weak fourth quarter, BMO has some "strategic decisions" to make about whether to incur further writedowns this year, said Mr. Mihelic.

"We believe it is reasonable to expect that BMO attempts to remove some of the uncertainty clouding its outlook by taking aggressive writedowns in the fourth quarter of 2007, and perhaps engaging in another restructuring, or in the very least seriously review some of its business activities," he said.

Bank of Montreal declined to comment on the CIBC report.
The Globe and Mail, Tara Perkins, 17 October 2007

The Bank of Montreal could be facing a significant write-down this quarter, because it may have been buying back billions of dollars in bank-sponsored asset-backed commercial paper, an analyst said in a note Wednesday.

Canada's banking regulator, the Office of the Superintendent of Financial Institutions, recently released data on the banks' August balance sheets.

BMO's balance sheet appears to have increased by $22-billion, or six per cent, during the month, CIBC World Markets analyst Darko Mihelic wrote in the note to clients.

“Approximately $13-billion of the increase was in debt securities where we believe the bank repurchased some of its own bank-sponsored ABCP,” he wrote. It appears that BMO funded the assets with wholesale deposits from both other banks and corporate customers, he added.

Canada's big banks operate on a fiscal year that ends Oct. 31. That means BMO might have some strategic decisions to make for year-end, Mr. Mihelic wrote.

”We believe there is a possibility that BMO records significant writedowns in [the fourth quarter],” he said. He declined to estimate the size of any potential writedown.

“We expect BMO's stock price to lag shorter term creating a buying opportunity,” he said. The bank has had a number of issues recently, including hundreds of millions of dollars in losses from its natural gas trading operations, and struggles at its basic banking business in Canada.

“We believe it is reasonable to expect that BMO attempts to remove some of the uncertainty clouding its outlook by taking aggressive writedowns in Q4/07 and perhaps engaging in another restructuring or in the very least seriously review some of its business activities,” Mr. Mihelic wrote.

He made it clear that “there is no definitive proof that BMO repurchased significant amounts of ABCP. However, it seems logical to us that this is in fact what occurred given the rather large movement in ‘debt' securities in BMO's August balance sheet. In other words, it is possible that BMO provided liquidity support to $13 billion of asset-backed commercial paper,” he said.

The Bank of Montreal has been one of the biggest players in Canada's bank-sponsored asset-backed commercial paper market. Commercial paper markets around the world fell into trouble in August when liquidity dried up. The problem was particularly severe in Canada's ABCP market that is not sponsored by the banks – the so-called third-party market, which is now frozen – while the bank-sponsored market continued to function. Mr. Mihelic noted that the other bank whose balance sheet expanded significantly more than its peers during August is National Bank, which has already disclosed that it is buying back about $2-billion of ABCP.