Bank Of Montreal Deal Another Sign Regional Banks Eying M&A

The takeover of Marshall & Ilsley Corp. (MI) by Bank of Montreal (BMO, BMO.T) announced Friday morning is the latest sign regional banks may be looking more toward mergers and acquisitions, which has sent their shares climbing.

The deal, with a solid premium and no government assistance, is seen as another early step toward a consolidation many had been looking for and a positive sign for the health of the banking industry in general.

The KBW Regional Banking index climbed 1.1%, while the KBW Bank index, which tracks large banks, rose 1.5%. Both were far outperforming the broader market, with the Standard & Poor's 500-stock index down slightly on the day.

Among the biggest movers were Regions Financial Corp. (RF) and Synovus Financial Corp. (SNV), two banks that still owe the government funds from the Troubled Asset Relief Program and have yet to turn profits.

BMO, in the latest move by a Canadian bank to expand its operations in the U.S., offered $4.1 billion in the all-stock takeover of the Wisconsin-based bank. As measured by Thursday's close, the deal valued M&I shares at $7.75, a 34% premium.

M&I was still weighed by $1.7 billion it owes the Treasury Department for funds it received from TARP and had seen its market value plummet in the face of commercial lending and real estate loan problems. Analysts had said it likely would need more capital to meet new requirements for safety nets and it was still recording losses.

Investors took the BMO rescue as a good sign for other banks that still owed TARP funds and have yet to return to profitability, such as Regions and Synovus.

Regions shares rose 4.2% to $6.39, the second time this week shares have rallied on merger talk. Regions still owes the government $3.5 billion and has had continued problems with non-performing assets.

Synovus, meanwhile, rose 5.2% to $2.62 as it still owes $968 million in TARP funds and posted a $181.4 million loss for its third quarter.

Among the other banks trading higher Friday were KeyCorp (KEY), Fifth Third Bancorp (FITB) and SunTrust Banks Inc. (STI), all of which have yet to return TARP funds. Key added 2.6% to $8.30, Fifth Third rose 1.9% to $14.19 and SunTrust climbed 2.3% to $26.45.

Earlier this week, Moody's Investors Service was among the latest to proclaim that a wave of consolidation is likely for large regional banks. The research report said the current analysis of the banks capital positions is likely to clarify the divisions between weak and strong banks, opening the door for takeovers across that divide.

New regulations in the U.S. are expected to hamper revenue growth at the banks, making slim margins and slow loan growth even more disconcerting. Analysts have said that could also scare some banks into the hands of stronger competitors.

Research firm and investment bank Keefe Bruyette & Woods said last week that merger activity is likely to increase as banks look to spend the large amounts of capital they have sitting idle on their books.

-By David Benoit, Dow Jones Newswires; 212-416-2458; [e-mail]