Morningstar DBRS Confirms Bank of Montreal's Long-Term Issuer Rating at AA; Stable Trend

DBRS Limited (Morningstar DBRS) confirmed the credit ratings on Bank of Montreal (BMO or the Bank) and its related entities, including BMO's Long-Term Issuer Rating at AA and Short-Term Issuer Rating at R-1 (high). The trend on all credit ratings is Stable. BMO's Long-Term Issuer Rating is composed of an Intrinsic Assessment (IA) of AA (low) and a Support Assessment of SA2, which reflect the expectation of timely systemic support from the Government of Canada (rated AAA with a Stable trend). As a result of the SA2 designation, the Bank's Long-Term Issuer Rating benefits from a one-notch uplift to the Bank's IA.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations and Stable trends reflect BMO's diversified franchise as the third-largest bank in Canada and a top 10 U.S. bank by total assets, resilient earnings, and strong balance sheet fundamentals. BMO's strong position in Canada is complemented by a significant U.S. franchise with increased scale, following the Bank of the West acquisition, that produces roughly 40% of the Bank's adjusted revenue and net income through an expanded geographical footprint that includes California. Further, BMO has historically exhibited strong risk management and credit fundamentals with better-than-peer credit quality metrics; however, the Bank experienced outsized credit deterioration relative to peers in F2024 amid a challenging operating environment. Lastly, BMO benefits from a relatively stable deposit base that is sourced in both Canada and the U.S., and Morningstar DBRS views BMO's liquidity and capital levels as solid.

The credit ratings also consider the heightened economic and geopolitical uncertainty, particularly as it relates to U.S. trade policy and tariffs, which has increased the likelihood of a recession in Canada (and to a lesser extent in the U.S.). This could lead to higher-than-expected credit losses, which would have an adverse impact on the Bank's profitability, and Morningstar DBRS notes that BMO's business mix is weighted more toward commercial lending than the lending portfolios of its peers and, as a result, can be subject to a higher degree of volatility.

BMO's IA of AA (low) has been assigned at the low point of the IA range, reflecting the Bank's higher proportion of commercial lending, particularly in the U.S.

CREDIT RATING DRIVERS
BMO's credit ratings would be upgraded if the Bank were to continue to significantly build the depth and scale of its franchise, particularly in the U.S., resulting in a sustained improvement in financial performance while maintaining a similar risk profile.

Conversely, a credit ratings downgrade would occur if there were a significant and sustained deterioration in profitability or asset quality. Additionally, material deficiencies in risk management or strategy execution leading to heightened operational risk or a weaker franchise would also lead to a downgrade of the credit ratings.

CREDIT RATING RATIONALE
Franchise Combined Building Block Assessment: Very Strong
BMO serves 13 million customers through top-tier businesses in Canada and a growing U.S. franchise, while being a top five commercial lender in North America. The Bank provides all major product lines, including commercial and retail banking, wealth management, and capital markets. BMO is also the most integrated North-South bank in North America, with a business model that drives efficiencies by leveraging its enterprise capabilities and scale in areas like digital, marketing, analytics, and product capabilities. In the U.S., BMO operates under its U.S. holding company, BMO Financial Corp. (BFC), and serves 4 million customers with presence in 14 of the top 25 metropolitan statistical areas (MSAs), including three of the top five MSAs.

Earnings Combined Building Block Assessment: Strong/Good
BMO typically generates solid earnings and profitability, underpinned by its diversified business franchise where the U.S. now drives a significant proportion of the Bank's revenue and earnings. BMO reported Q1 2025 adjusted net income of $2.3 billion, a 48% increase on a quarter-over-quarter (QOQ) basis, reflecting notably lower provisions for credit losses (PCLs) and higher revenue, partly offset by higher noninterest expenses. Adjusted net interest margin (NIM), excluding trading and insurance assets, increased 2 basis points (bps) QOQ to 1.93%, primarily because of higher margins in the Personal and Commercial businesses, partly offset by higher low-yielding assets in Corporate Services and lower margins in Capital Markets. In F2024, BMO reported adjusted net income of $7.4 billion, down 15% year over year (YOY), driven by notably higher PCLs that more than offset higher noninterest income. Adjusted NIM decreased 3 bps YOY to 1.85% on lower net interest income and higher low-yielding assets in Corporate Services, partly offset by higher margins in Capital Markets and Canadian Personal and Commercial.

Risk Combined Building Block Assessment: Strong
Overall, Morningstar DBRS views BMO as having a sound risk profile with a loan portfolio that is well diversified by geography, industry, and product. Although the Bank has historically experienced lower-than-peer average loss rates, BMO experienced outsized credit deterioration relative to peers in F2024. PCLs increased 155% YOY to $3.8 billion in F2024 (excluding the F2023 initial provision of $705 million on the acquired Bank of the West performing loan portfolio) and the total PCL ratio was up 33 bps YOY to 57 bps. This was primarily driven by higher impaired PCLs in the U.S. Corporate and Commercial portfolio, as certain client cohorts where the Bank took larger hold sizes experienced the impact of prolonged elevated interest rates, tightening credit conditions, and shifting consumer demand for products and services. In Q1 2025, PCLs decreased 34% QOQ to $1.0 billion and the total PCL ratio decreased 33 bps QOQ to 58 bps, driven by lower PCLs in Capital Markets and U.S. Commercial Banking that were partly offset by higher PCLs in Canadian unsecured consumer lending. While the Bank indicated that Q4 2024 would likely be the PCL highpoint, the uncertainty related to U.S. tariffs has created a more challenging operating environment which could lead to higher-than-expected credit losses as performing PCLs likely ramp up in F2025 while impaired PCLs may take longer to moderate.

Funding and Liquidity Combined Building Block Assessment: Strong
BMO has a strong funding and liquidity profile that is underpinned by broad-based client-sourced deposits in both Canada and the U.S. In the falling interest rate environment, the deposit mix is shifting to higher-demand deposits across retail and commercial customers and declining term deposits. At the enterprise level in Q1 2025, average customer deposits of $723 billion were up 3% QOQ from growth across all operating groups and the impact of the stronger U.S. dollar. Approximately 50% of U.S. deposits were insured as at December 31, 2024. Augmenting its deposit funding, BMO also enjoys ready access to diversified wholesale funding sources, with BMO's usage within an acceptable range and in line with the Canadian bank peer average. Further, the Bank is holding elevated liquidity levels (similar to its peers) as at January 31, 2025, with a liquidity coverage ratio of 128% and a net stable funding ratio of 116%, both comfortably above the regulatory minimum thresholds.

Capitalization Combined Building Block Assessment: Strong
Morningstar DBRS views the Bank's capitalization as strong, reflecting current capital levels as well as its significant internal capital generation ability. In Q1 2025, BMO's CET1 ratio was 13.6%, relatively flat QOQ, reflecting internal capital generation that was essentially offset by higher risk-weighted assets and 1.2 million common shares repurchased under its normal course issuer bid program established in January 2025 to repurchase up to 20 million common shares. Morningstar DBRS expects the Bank will maintain a CET1 ratio above 12.5%. Additionally, BMO's risk-based total loss-absorbing capacity ratio was at 29.8% and its leverage ratio was 4.4%. All ratios remain comfortably above the required regulatory thresholds. Morningstar DBRS notes that BFC is a Category III firm in the U.S. and is required to comply with higher regulatory expectations, including biennial company-run stress testing, annual supervisory tress testing, supplementary leverage ratio, and a counter-cyclical buffer.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/454688.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) at https://dbrs.morningstar.com/research/454196.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 4, 2024) https://dbrs.morningstar.com/research/433881. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at
dbrs.morningstar.com

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

These are solicited credit ratings.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website https://dbrs.morningstar.com/understanding-ratings.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's trends and credit ratings are monitored.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Carl De Souza, Senior Vice President, Sector Lead, North American Financial Institution Ratings
Rating Committee Chair: John Mackerey, Senior Vice President, Sector Lead, North American Financial Institution Ratings
Initial Rating Date: December 31, 1980

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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